Protecting your hard earned cash flow is equally as important as earning it. Warren Buffett said that the first rule of investing is not to lose money, and the second rule is to refer to rule number one. The way most people lose money, other than in the market, is Uncle Sam. Taxes. One of the key strategies for growing wealth and keeping it, is to minimize taxes. When it comes to your retirement assets, the more capital you have, the more compound interest you gain. Here are some tips on how you can save on tax bill while continuing to grow your retirement nest egg.
1. Save on Taxes with IRA’s
IRA’s allow you to save for retirement tax deferred or tax free depending upon the savings vehicle. The IRS sets a limit every year on the maximum allowable contribution. For 2017, the maximum contribution limit is $5,500 or $6,500 if you are 50 years old or older. Traditional IRA’s allow you to save on a tax deferred basis, meaning you pay taxes at withdrawal. You can make withdrawals starting at age 60 but you are required to make an annual withdrawal beginning at age 70. The money invested in a Roth IRA is taxed up front, but grows tax free. Which means that neither your contributions nor the investment earnings are taxed when withdrawn at retirement.
2. Lower Your Taxable Income with Workplace Savings Accounts
Many employers offer a retirement plan like a 401(k) which allows employees to save for retirement with tax deferred dollars. Much like an IRA, 401(k)’s have a maximum allowable contribution limit, which is substantially higher than an IRA. Both the contributions and the earnings are taxed when withdrawn from the 401(k) at retirement. There are a few negatives however. The first is that most 401(k) plans typically have very limited investment options, a handful of under-performing mutual funds if you’re lucky. Second, the killer of investment returns, FEES. Workplace plans have substantially higher fees than IRA’s. One of the great things about 401(k)’s is the free money you can get if your employer matches your contributions. In most plans its between 2-6% match, meaning if you contribute 6% of your paycheck your employer will also contribute 6%. That is something that does not exist in an IRA. Max that sucker out. Be mindful when putting money into a 401(k) and try to get an understanding for how your money is being invested. Most companies allow you to manage your 401(k) so you can choose how to invest your retirement savings. Check with your employer or plan administrator.
3. Double Savings with Health Savings Accounts
HSA’s are not a retirement account, per se, but they are unlike any other savings option out there. Get this, the contributions you make to a health care savings account are both tax deductible (meaning contributions are deducted from your tax bill) and earnings grow tax free (meaning you don’t pay tax on the money that comes out). Double Whammy!
2017 IRS rules state, you can contribute up to $3,400 annually for an individual, and $6,750 for a family. Depending upon the HSA you use, the funds you contribute can be invested into select mutual funds, which aren’t the best investment option but with these kinds of tax benefits who cares. It’s not an investment account, its a health care savings account that can be invested. You are not required to use the funds in your account the same year you add them and they don’t expire or fall under the “use it or lose it” idea. The account can remain open, and you can continue to contribute to it for many years all the way into retirement. HSA’s are a great way to save for medical costs now and in retirement and all withdrawals used for medical expenses are tax free. Cannot say enough good things about the health savings account.
Set up a Brokerage Account
There are many ways to save for retirement, both tax deferred and tax free. Not all of your investment capital is going to be pretax dollars so once you retire you’ll begin to withdraw the funds from these tax havens and you’ll need a place to put the funds. Set up a brokerage investment account. You can set it up online in 10 minutes with any of the discount brokers out there, Schwab, TD Ameritrade or Fidelity. Any savings you have beyond what you’re putting into your pretax accounts would dump right into this account. This account is perfect for any cash flow from things like: real estate rents, cash generated from your business, inheritance, and tax refunds, etc. All of it goes here to be allocated to an investment. These brokerage accounts have all the features of a checking account, like check writing, debit card, and online access.
Saving for retirement is simple, but it’s not easy. It requires sacrifice, discipline and some know how. With these tips you should be able to keep more of your hard earned money and enjoy a very nice, comfortable retirement.