Retirement savings and taxes

Retiring with enough savings to live comfortably is attainable with proper planning. However, it’s important to understand a few “ground rules” at the outset. First, companies are increasingly not offering pensions for their employees like they were a generation or two ago. Second, social security alone will unlikely be able to provide the funds to live the way you want in the future. This leaves you with the responsibility to save the bulk of your retirement fund yourself.

Your retirement plan

In the United States, we are fortunate to have several tax-savvy ways to prepare for retirement. Two of these are Individual Retirement Plans (IRAs), created for retirement saving by Congress, and 401-K plans, offered by many employers. There are also annuities that you can purchase. In addition, there are tax-advantaged methods, such as regular brokerage accounts, that you can fund.

401-Ks and IRAs: Amazing vehicles for tax deferral

Individual Retirement Accounts (IRAs) are tax-deferred investments that enable anyone with income to save up to a specific amount every year for retirement. The great beauty of these investment vehicles is that they can grow without being taxed until retirement. This enables you to save a bundle on tax payments to Uncle Sam while at the same time harnessing the effect of compounding. IRAs are quite versatile in the respect that you can invest in mutual funds, certificates of deposit, and individual stocks and bonds; you can even invest in real estate or precious metals.

When looking into an IRA, be aware that there are Traditional IRAs and Roth IRAs. Although both have tax advantages, Roths are generally preferable because you can withdraw your money with no tax liability when you are eligible to retire.

Like IRAs, 401-Ks are also tax-advantaged instruments. They differ from IRAs principally because they are offered by employers instead of the government. In general, these plans give you the ability to dedicate even more funds than most IRA plans. As in the case of IRAs, there are two versions: Traditional 401-Ks and Roth 401-Ks.

Other types of savings

Additionally, you can and should also save outside of your tax-deferred investments. One excellent way is to construct a portfolio of stocks whose dividends are raised every year. Over the years, reinvestment of a continuously growing dividend stream has been amazingly successful for many folks. You may also wish to purchase one or more annuities, which will guarantee you a specific amount of money each month in your retirement.

Prepare well for retirement

Now you have the basic elements of a quality tax-efficient retirement funding plan. Take the necessary steps and your retirement will be on sound financial footing. Jeffrey Lee Financial has answers to all of your questions.