Harness the Power of Tax-Advantaged Accounts for Your Financial Plan

For those looking to maximize savings and investments, tax-advantaged accounts offer substantial tax benefits and tax-preferred compound growth. By utilizing tax-advantaged vehicles including 401(k)s, traditional IRAs and Roth IRAs, or municipal bonds tax-advantaged vehicles, you can confidently meet your savings goals and secure a future of financial freedom.

Tax-deferred accounts, including 401(k)s and traditional IRAs, are useful tools for lowering taxes. These accounts delay taxes on income you have earned until your funds are withdrawn, which typically happens during retirement. This strategy can be helpful if you expect to be in a lower tax bracket while in retirement. With these accounts, your contributions will also grow tax-deferred.

Differences between traditional 401(k)s and traditional IRAs:

• Traditional 401(k)s use your pretax income for contributions, reducing your taxable income. When you later withdraw from these accounts, you are typically taxed—however, at the time of withdrawal you may be in a lower tax bracket. If your employer offers a 401(k), your employer may match a portion of your contributions.
• With traditional IRAs, contributions are also made with pretax income and are often tax-deductible in the year they are made, reducing your taxable income for the year. One drawback of traditional IRAs to consider are required minimum distributions (RMDs), which you must take beginning at age 73.

Conversely, accounts such as Roth 401(k)s and Roth IRAs offer future tax benefits, as withdrawals at retirement may be tax-exempt. Contributions to these accounts are made using post-tax income, meaning there is no immediate tax advantage. However, the return on your contributions grows tax-free, and there are typically no taxes upon withdrawal during retirement.

• Roth 401(k)s are another type of employer-sponsored retirement plan that allows your employer to match your contributions. You may deduct a certain amount from each of your paychecks to deposit into your Roth 401(k). Limitations to this type of account include that the account must be held for a minimum of 5 years, and that you must be 59 ½ years old before you are eligible to make tax-free withdrawals.
• Roth IRAs generally have less restrictions than other tax advantaged accounts, as there are no RMDs and the contributor can hold the Roth IRA indefinitely. However, there are limitations on the amount you can contribute.

Municipal bonds issued by local governments typically offer interest income that is shielded from federal—and sometimes state and local—taxes, making them an attractive option for generating a tax-free income, particularly if you are in a higher tax bracket.

Utilizing the power of tax-advantaged accounts to begin your retirement, educational, and healthcare savings journeys will encourage long-term growth in your savings for a prosperous future.