Wondering how to start saving for retirement? It’s never too early to start planning: the earlier the better.
Before you start, you need to have a plan. If you just start saving money blindly, you might be setting yourself up to pay a lot of taxes, either now, or later on.
Taxes on your retirement savings can be a major problem, reducing your future retirement income. This is why it’s vital to save money for retirement in tax advantaged accounts.
A normal bank account won’t cut it because inflation will reduce its value over time. However, an account without tax savings benefits can be just as problematic.
Keep reading to discover how to use tax advantaged retirement accounts for a long, happy retirement.
Choose Your Tax
When it comes to saving money in tax advantaged accounts, you can either defer paying taxes until you’re in retirement, or you can pay taxes now, so you don’t have to pay it in retirement.
Choosing a strategy depends on your income level and the current tax rates. Tax-deferred accounts include those such as a 401K, allowing you to deposit money now without paying tax.
When you pull the income out while in retirement, you’ll have to pay taxes. This can work in your favor if you have a high income now, and thus, a high tax rate, but plan to be in a lower tax bracket in retirement.
Tax-exempt accounts are those in which you pay taxes on the money before putting it into the account. Then, when you withdraw in retirement, you won’t need to pay any additional taxes. These accounts include a ROTH IRA or a ROTH 401K.
This can work in your favor if the current tax rates are below the historical average. For those who are high-income earners, there are additional considerations to keep in mind. If you are a high-income earner, you can read more here.
Find the Right Tax Advantaged Account
Today, there are far more tax-advantaged accounts than before. Self-employed individuals always found it difficult to save for retirement. However, today they can opt for the powerful Solo 401K, allowing them to contribute up to $18,000 of pretax income each year.
There is also the self-directed IRA, which allows you to control where your retirement savings are invested. This is useful if you’d rather be invested in things like real estate or precious metals, or diversify your savings as much as possible.
Automate Your Savings
When it comes to saving for retirement, your plan needs to be put on autopilot. If you rely on manually depositing money into your retirement accounts each month, you’re going to be hurting by the time you approach retirement age.
Instead, make sure a set amount of money is automatically transferred from each pay period during your working career. ‘Paying yourself’ should be the first thing you do each time you receive a paycheck.
The sooner you set up your retirement plan, the sooner you can have peace of mind. The problem is that many Americans still aren’t saving for retirement.
Don’t be like them. No one wants to work into their 70s and 80s. Take control of your future today by setting up and automating your tax advantaged retirement account today.
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