During these stressful economic times, we are all looking for ways to save as much money as we can. Fortunately, financial advisers tell us there are a variety of ways to do that.
"The important thing to understand is that there are different types of tax-advantaged accounts that are out there. What you’re able to do is you can buy different types of investments within the account and then the returns are tax-advantaged."
Let’s start with one of the tax-advantaged accounts that many are familiar with – the 401k. When you contribute to your 401k, it reduces your tax liability for that year.
"So every dollar that you contribute to your 401k, that’s a dollar that you save on your taxes for that year. When you eventually withdraw funds from the 401k account, your distributions will be taxable at your ordinary income tax rate at that time."
The thinking here is, when you withdraw the funds in retirement, you will likely be in a lower tax bracket. Then there is the Roth IRA. You have already paid taxes on those dollars.
"The earnings that accumulate in the account is not taxable. And even when you make withdrawals from the accounts, those withdrawals are also not taxable."
The Roth IRA is similar in some ways to an annuity.
"Your earnings are tax deferred, meaning that you’re not having to pay taxes on any type of growth that happens in the account. Now, when you decide to eventually withdraw funds from the annuity,then at that point you’re paying regular income tax on the withdrawals that you make."
But again, by that time, you should be in a lower tax bracket. Thuy, like the rest of our experts, recommends that you talk to a financial adviser about which plan is best for you.
See the original article at: KHON2 Local News
