Money Saving Tips :: Tax Efficient Savings
Tax Efficient Savings:
A Comparison of Tax Efficient Savings
The most common tax efficient savings plans which are offered by employers and banks are IRAs and 401(k) plans. There may be other tax efficient savings plans offered by your employer too, so you need to ask your Human Relations department about that.
The Differences
An IRA is a private investment, which you fund entirely from your own finances, whereas a 401(k) fund offers tax efficient savings jointly from your own contributions and those of your employer, in varying proportions.
Let’s have a closer look at how you can use IRAs and 401(k) plans for tax efficient savings:
401(k) Plans
Once you reach 59 years and 6 months, you can start to withdraw money from your 401(k) Plan without incurring tax penalties, so they make good tax efficient savings. Seriously, if you don’t take advantage of the money your employer will pay into your 401(k) plan, you have rocks in your head.
Never mind tax efficient savings, this is money for nothing! Because this is a retirement plan, you don’t pay any taxes on the money you pay into your 401(k), only on the money you take out of it, so you save quite a bit by deferring tax in this way.
Annually, you can invest $10k or fifteen percent of your salary in 401(k) tax efficient savings, whichever is the smaller amount, so yes it’s capped, but often tax efficient savings are: the Government has to make its money somehow! Your employer can match your contributions
IRAs
An IRA is an Individual Retirement Account. There are two types of IRA tax efficient savings plans: traditional and ROTH. The ROTH is the newest version of this tax efficient saving plan and is quite simply the best thing to have happened to tax payers in a very long time.
ROTH contributions are not deductible. If you have saved into a ROTH for at least five years and don’t withdraw your money until you pass the age of 59 years 6 month,s you won’t pay tax on any of it. Yes, you read that right – none of it, not the main boy of the savings nor the interest, dividends or capital gains are taxable. That makes it great for tax efficient savings.
In fact, if you have found more tax efficient savings than the options above, I want to know – right now!
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MoneySaveTips.com :: Tax Efficient Savings