Have you ever avoided taxes altogether? If you have ever had a job, then you haven't. Taxes are inevitable and normally when we get money in any form, we have to pay taxes on it, including retirement. That doesn't have to be true though!
Retirement accounts are one of the governments loopholes where if you just plan ahead, than you can receive a paycheck during retirement TAX FREE! That's right no taxes at all. Are you listening yet? The second I realized this was real I opened up each type of 'deferred' and 'Tax Exempt' account as soon as I could.
A couple of popular examples are 401k's and social security that we pay into. Retirement accounts don't stop there!
- Contributions to this account is taxed up front, yet the growth and withdraws are 100% tax free so long as you pull out the money after 59 1/2
- Pulling money from your retirement account before 59 1/2 can also be tax free so long as your account is 5 years old up to $10,000 for 'qualified first-time home buyer expenses'
- Roth IRA's allow you to invest into whatever you want, individual stocks, index funds, lifestyle investments, and many creative investments as well!
- The only problem? You can't earn too much money or the government limits your contributions, so invest now! Right now (2018) the government limits your contributions to $5,500/yr under 50 years old and $6,500/yr over 50. If you earn more than $120k than your limited to the amount on contributions and above $130k your not allowed to contribute anymore.
- Contributions into this type of retirement account can actually lower your taxable income which can qualify you for other incentives like the child tax credit or a student loan deduction.
- If you are under 59 1/2 you can also withdraw $10,000 early, for qualified first time home buyer expenses and also higher education expenses
- Hardships like unreinbursed medical expenses and disability could also qualify for early contributions
401k, Deffered Comp, 403b:
- All of these retirement accounts are taken out of your paycheck pretax. Which means that Uncle Sam never sees a drop of that money until its time to take the contributions out.
- There is definitely a place for these accounts and if your employer matches your 401k, than you are loosing out on free money if you don't take advantage of that plan
- On the flip side, most of us plan to earn more money when we retire, and if that places you into a higher tax bracket than you are currently, you could be paying more in taxes later on.
- This though process goes both ways, because these accounts lower your taxable income and can be very beneficial if you are about to jump into the next tax bracket right now.
- Most of these accounts have the same limits with 59 1/2 years old being the magic number when you can start withdrawing money.
Just know that knowledge is power! All you have to do is spend a couple hours of research and you can easily save thousands of dollars in the long run. The government gives many benefits for these retirement accounts and I encourage you to start planning for and taking advantage of that retirement now!
Remember if you ever have any questions feel free to contact me at any time, or if you have a topic you want covered just let me know!