Saving on taxes can help you plan for your retirement, pay for healthcare, and even sponsor your kids’ higher education. Finding ways to save taxes lets your money work for you, improving your financial health. If you’re looking for a tax break, there are several options to choose from. Calculate taxes as the first step, and then determine what savings account or retirement plans work for you. Keep reading as we detail the top savings accounts with valuable tax benefits that will help grow your finances.
Offered by a vast majority of employers across the United States, a 401(k) is a preferred retirement plan that helps you save for retired life. When you contribute to a 401(k) plan, the deduction is made on pretax money, reducing your tax load.
As per the Internal Revenue Service (IRS), the annual limit for individuals below 50 years of age for 2020 is $19,500. If you’re 50 or older, you can contribute up to $6,000/year above the amount specified for younger individuals.
Some employers will match a percentage of an employee’s contribution. These contributions are, however, not considered when determining your annual limit. 401(k) is a great way to get a tax break on your contribution and accrued profit and can be withdrawn at minimal tax rates when you’re 59.5 years old. This is a good retirement plan if your employer is contributing to the fund, and are if you’re willing to wait until retirement to withdraw the amount. You must also commit to regular contributions to make this plan a success.
With a traditional IRA, you can bank funds at pre-tax, helping you postpone paying taxes until you withdraw money from the plan. However, like most tax-benefit plans, traditional IRA comes with a few norms and regulations which you must be aware of.
Those under 50 are allowed to deposit up to $5,500 annually in an IRA, while individuals who are 50 and higher are allowed to contribute up to $6,500 per year. The most important factor to consider when investing in a traditional IRA is that if you withdraw the amount before you’re 59.5 years old, you’ll incur a 10% penalty over the normal income tax you’ll be paying.
A traditional IRA allows you to build a financially secure retired life, giving you money a chance to grow. When you remove the amount after retirement, you’ll be in a lower tax bracket, allowing you significant tax savings during your prime years.
529 plans are governed by state laws and are to be used for educational expenditure. Though there’s no annual contribution limit, there’s a cap on the total amount contributed towards this account. Your gains are not taxed by the federal government and, in most cases, will not fall in the state taxes category if used for tuition, boarding, and other college expenses. This is a great tax-saving option if you want to save for your children’s higher education. Your investments on 529 plans will gain significant benefits on both federal as well as state taxes.
It’s important to invest wisely to defer or lower taxes so your hard-earned income can see real growth and secure your future.