When it comes to savings, setting aside a certain amount of money is only the beginning of the process. You should aim to save money with growth in mind, but even more importantly, you should save in a way that keeps your tax liability as low as possible. To achieve this goal, you need to learn how to save with taxes in mind.
Maximize Your 401k
If you have an employer who offers a 401k savings plan and you can afford to maximize your contributions, there is no reason you should not be doing so. Maximizing your contributions for the year helps in many ways. First, it lowers your taxable income, which means that you owe less money. Second, it grants you the opportunity to add more money to a savings account that you will not be required to pay taxes on gains each year.
Open an IRA
Think about opening an IRA, or individual retirement account. IRA accounts are great if your employer does not offer a 401k account, but they can be used alongside these accounts as well. Similar to the 401k, the money you contribute to these accounts is tax-deferred, which means that the amount equivalent to the deposit into the IRA will be deducted from your income in terms of computing your tax liability. Keep in mind, however, that there is a limit on how much income you can defer, but anything is better than nothing.
Consider Tax-Focused Savings
When it comes to long-term, income-earning investments, always look for plans with a tax focus. A tax-free municipal bond is a great example of a tax-focused savings plan. When you initially invest in the bonds, the money you use to purchase the bonds is taxed. However, the income that is earned from the bond is not taxed. So, as time progresses and you earn more money from the bonds, you get to shield the earnings.
There is a careful balance between maximizing your savings, allowing these savings to grow, and minimizing your tax penalty. If you do not go about this process right, you could grow your savings but grow your tax liability at the same time, which could bring you less money. To navigate this balance, you need to connect with a tax planning professional who can point you in the right direction.
Make sure you are saving the right way. Connect with a professional who will put you on the right course.
To learn more, contact a resource that offers tax planning services.