3 smart strategies to defer taxes and boost retirement savings
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Hear us out, people: you won’t be young forever, and neither will you be healthy. That is why you must start saving for retirement. Though retirement is a beautiful phase of life, it can cost you much more than you think.
It’s generally estimated that you’ll need 80% of your pre-retirement income to maintain your lifestyle post-retirement.
You might be stashing some amount of money each month. But you will barely manage if you rely solely on your savings. A fixed annuity is a wise move, and a fixed index annuity calculator to calculate how much your investment could grow over time based on favorable annuity rates and market conditions. Deferring taxes, however, can help you maximize your retirement savings, ultimately paving the way for a more financially secure future.
In this article, we’ll explore several savvy tactics that can help you defer taxes and boost your retirement savings.
#1 Contribute to tax-advantaged accounts
You can reduce your tax liability while boosting retirement savings by adding funds to tax-advantaged accounts.
Individual retirement accounts or IRAs (Roth or traditional), 401(k)s, and Health Savings Accounts (HSAs) are common examples of tax-advantaged accounts. These accounts offer significant benefits for retirement savings. You will either enjoy tax benefits upfront or when you withdraw funds in retirement.
Traditional IRAs and 401(k)s are tax-deductible. When you contribute money to these accounts, the amount is subtracted from your overall income for the year. Thus, you pay taxes on less income, lowering your overall tax bill.
To put it another way, if your annual income is $50,000, and you contribute $5,000 to a traditional IRA or 401(k), you can deduct your contribution from your taxable income. It will, thus, be reduced to $45,000, and you will owe less in taxes that year.
Note that the IRS has announced that workers can add up to $23,000 in their 401(k) account in 2024. The contribution limit for IRA, on the other hand, is $7,000/$8,000 for those age 50 and above.
Contributions to HSAs are also tax-deductible. You can open an HSA and use the funds for not only medical expenses, but also to squirrel away extra funds for retirement. Roth accounts, conversely, don’t offer immediate tax benefits. But you will enjoy tax-free withdrawals in retirement.
#2 Explore fixed annuity
Fixed annuities are another option you can consider for tax-deferred retirement savings.
A fixed annuity, AnnuityAdvantage explains, is a sort of annuity where your contribution earns interest at rates established by the insurer or as specified in the annuity contract.
You will have to pay a lump-sum amount or make a series of payments to your insurer or the insurance provider. In return, you will receive regular income payments for a set length of time or the rest of your life.
In 2023, annuity rates had surpassed 6% for the first time in over a decade. Yahoo’s recent publication revealed that. Currently, they can reach as high as 6.05%, depending on the type of annuity.
Consider using a fixed index annuity calculator to calculate how much your investment could grow over time based on these favorable annuity rates and market conditions.
These calculators allow you to input a variety of parameters, such as your initial investment, the amount of time you plan to invest, and the estimated rate of return. You will gain insights into the potential growth of your investment and make informed decisions about your financial future.
Your earnings in a fixed annuity grow tax-deferred, however. You won’t have to pay taxes on investment gains or interest until you withdraw funds. This is beneficial because your money compounds over time without being depleted by annual taxes.
Moreover, a fixed annuity doesn’t have a contribution limit, unlike IRS and 401(k)s. If you have maxed out other retirement savings options yet have more to invest, a fixed annuity will be your best bet.
#3 Implement a roth conversion strategy
A Roth conversion, simply put, involves moving funds from a traditional retirement account, such as a traditional 401(k) or IRA, to a Roth account.
Opting for it means you will have to pay taxes on the money you convert, but your withdrawals from the Roth account will be tax-free. If you believe you will be in a higher tax bracket in retirement, it would be best to implement this strategy. Paying taxes now will be better than later.
Roth IRAs, unlike other forms of retirement funds, aren’t subjected to set minimum distributions during your lifetime. If you don’t need the money for your living expenses, you can let it grow and pass it to your heirs.
When you convert a portion of your regular retirement asset, you can manage your tax liability in retirement and perhaps mitigate the impact of future tax rises.
To wrap things up, it’s critical to pay all of the taxes owed to the government, but you can defer taxes and bolster your retirement savings. These strategies will help you minimize your tax burden while maximizing your retirement nest egg.
It may also be wise to seek professional advice since navigating the complexities of tax planning and retirement saving isn’t easy. Finally, remember that it’s never too early or too late to start planning for retirement, so take action today to secure a brighter tomorrow.
