Let your money grow before paying tax on it!
Want to lower your income taxes while investing in your future? Take advantage of tax-deferred (tax sheltered) investment plans. The U.S. government offers more than one way to reduce your tax bill today . . . while saving money for tomorrow.
The Internal Revenue Service (IRA) allows you to invest some of your earned income . . . before you pay taxes on it. IRS-approved accounts include:
- Traditional IRAs (Individual Retirement Accounts) *
- Health Savings Accounts
- Education Savings Accounts (529s)
- Deferred Annuities
*Roth IRAs, while purchased after taxes, have other investing advantages. (Roth IRAs, Health Savings Accounts, Education Savings Plans and Deferred Annuities will be detailed in upcoming blog articles).
Traditional IRAs lower your tax bill today . . . while saving money for tomorrow
For every $100 earned in gross income, most people pay 10 to 25 percent or more in taxes, leaving them with only about $70 to $90 in take-home pay to spend or save. Those who opt for tax-deferred traditional IRAs, though, can deposit the entire amount earned into a traditional IRA . . . up to a certain amount limited annually by the IRS.
If you put $100 a month (after taxes) into any other type of bank accounts, you actually have to earn $110 to $135 or more of pre-taxed income for the same results.
Of course, Uncle Sam will want to collect taxes from you eventually. However, you can accumulate a lot more money in the meantime. Untaxed money grows at greater rates through:
- Compound interest on bigger balances over longer periods of time.
- Lower tax brackets as people age, lose jobs or income, or retire later in life.
Some restrictions apply
You’ve probably heard that you have to be at least age 59½ before you can withdraw money from a traditional IRA. You can take money out for emergencies at any age . . . if you pay a 10 percent penalty plus your current tax rate. Paying a penalty makes it possible to access your savings if you have a need for some of the money sooner. Penalties also encourage people to invest their savings long enough, giving it a chance to grow until they’re older.
There are some exceptions for taking out money earlier before age 59½ without penalties. You can withdraw from your IRA savings, for example, for a down payment on your first home. You’ll have to pay taxes, of course, on that previously untaxed income, but you won’t pay any early withdrawal fees . . . no matter how old you are when you purchase your first house. The IRS also allows early withdrawals without penalty for catastrophic illnesses and other life-altering events. An IRA account can be a good hedge against disaster, as well as a nice nest egg for later.
To find out more about the benefits of tax-deferred investing, contact Ron VanSurksum at Advanced Asset Management. Email: firstname.lastname@example.org or call him at (616) 531-5220 or (616) 450-8439.
Manage Your Money . . . helpful financial facts provided for you by Advancd Asset Management LLC Follow our blog: aamllc.com
Ronald Van Surksum, CFP 4555 Wilson Ave SW – Suite 2 Grandville, MI 49418 email@example.com P: (616) 531-5220 For permission to reprint: firstname.lastname@example.org