With the loss of corporate pensions and concerns about the long-term viability of Social Security, most Americans expect to be personally responsible for funding their retirement to a degree unimaginable just a few generations ago. So the sooner you can start saving and investing, the better your chances for a secure retirement.
One way you can help grow your retirement savings faster is to take advantage of tax-deferred investing. A tax-deferred account is valuable because there is no tax due on income earned until you begin taking withdrawals, typically when you retire. This provides the potential to accumulate retirement savings faster than in a taxable account.
Employer-sponsored retirement plans, such as 401(k)s and Individual Retirement Accounts (IRAs), are examples of tax-deferred accounts. If your employer offers a 401(k) or similar plan, consider contributing up to the maximum allowable amount. If you’re not able to contribute the maximum and your employer offers a matching contribution, contribute as least as much as the match. Otherwise, you’re leaving money on the table.
If your employer doesn’t offer a plan or you’re self-employed, you can open an IRA. Even if you already participate in a plan at work, an IRA can help supplement those savings and give you access to a wider range of investment options.
The power of tax-deferral can really make a difference over time. Consider this example: An investor in a 25% tax bracket contributes $5,500 to a tax-deferred account that earns an annual return of 6%. Over the course of 30 years, the account value would grow to $460,909 vs. $350,909 in a taxable account – an increase of more than $110,000!
By following a pattern of consistent savings and taking advantage of the power of tax-deferral, you can take control of your retirement savings. Talk to your financial advisor about how tax-deferred investing can fit into your overall financial plan.
Brighton Securities does not render legal advice, please consult your tax counsel for any legal advice related to tax deferred or non-qualified accounts.
This article was written by/for Brighton Securities and provided courtesy of Todd Alexander, Financial Advisor