Benefit From Tax-Sheltered Retirement and Education Accounts
Are you interested in saving money for retirement, or your child’s college education, but don’t know the best way to go about it? Does it seem like a daunting task to be able to save that much money, even over a long timeframe, especially given the issue of having to pay taxes on it each year? Well, just so you know, the U.S. government understands your situation, and has provided you with a way to save for these events, without having a tax buildup to do so, in the form of tax-sheltered accounts. The following are a list of legal tax-sheltered accounts that you are encouraged to use:
Individual Retirement Accounts (IRAs)
Traditional IRA: With a traditional IRA, you are allowed to save a substantial amount of tax-deductible income each year, and have it earn interest and/or capital gains tax-free, until you withdraw it at retirement, at which time you pay income taxes on the withdrawal.
Roth IRA: With a Roth IRA, you are allowed to save a substantial amount of after-tax income (not tax-deductible) each year, and earn interest and/or capital gains tax-free until you withdraw it at retirement, at which time you pay no taxes on the withdrawal.
SEP IRA: SEP IRAs are for small business owners or self-employed individuals to be able to make contributions into a Traditional IRA in his or her name.
SIMPLE IRA: Savings Incentive Match Plan for Employees - allows employer and employee contributions, similar to a 401(k) plan, but with simpler, less costly administration, and lower contribution limits. (Investor.gov)
For more detail and information on qualified contributions and required distributions, go to the IRS website.
In addition to IRAs, there are private employee tax-sheltered accounts: 401(k) and 403(b) Plans.
401(k) or 403 (b) Plan: tax-sheltered employee (401(k)) or government (403(b)) – sponsored retirement plans which may be contributed to by employees - many companies offer to match contributions to accounts.
While these accounts are private, they are regulated by the Internal Revenue Service.
You may want to review your options, to see which type of retirement account(s) work best for you.
529 Plans (Education Savings Accounts)
529 plans are tax-advantaged savings plans designed to help pay for qualified educational expenses, including K-12 tuition, college, vocational schools, and apprenticeships. They are offered by states and educational institutions, and while contributions are not tax-deductible at the federal level, the money in the account grows tax-deferred, and withdrawals for qualified expenses are tax-free. There are two main types of 529 plans: savings plans and prepaid tuition plans.
529 Savings plan: Functions like a 401(k) or IRA, where contributions are invested in options like mutual funds and ETFs. The account value fluctuates with market performance. This is the more common and flexible type of 529 plan.
529 Prepaid tuition plan: Allows you to purchase tuition credits at today's prices for future use at a specific network of schools, often in-state public universities. This locks in current tuition rates, but is less flexible than a savings plan. (Google AI Overview)
You may want to review your options, to see which type of education account(s) work best for you.
There you are, tax-sheltered accounts provided for you by the U.S. government that can allow you to save substantially more money over a long period of time, to help you meet your retirement goals, and pay for your child’s education. You may want to review your options with a CPA (Certified Public Accountant), CFP (Certified Financial Planner), and/or an estate planning attorney to decide what types may be best suited for your situation.