Let’s talk about this again.
What is a tax advantaged account?
Essentially, any accounts that minimize the burden of taxes while you’re saving or investing.
They’re available in formats such as: employer-sponsored retirement accounts, Individual Retirement Accounts (IRAs), health-related accounts, and education savings accounts.
We’ll break it down based on your specific tax goal and go from there.
Pay Taxes Now
Roth IRA
Retirement savings account. Contributions to a Roth IRA are not tax-deductible, but qualified withdrawals in retirement are tax-free. This means you contribute after-tax income, and your investments can grow and be withdrawn without additional taxes.
Pay Taxes Later
401(k) Plans
Retirement savings account. These are employer-sponsored retirement accounts. Employees can contribute a portion of their salary to the plan, often with the option of employer matching contributions. Generally, contributions are made pre-tax, which reduces your current taxable income. Taxes are deferred until withdrawal during retirement.
403(b) Plans
Similar to 401(k) plans, but these are typically offered to employees of nonprofit organizations, schools, and certain government entities.
457 Plans
These plans are provided to employees of state and local governments and some nonprofits. Like 401(k) plans, contributions are pre-tax, and withdrawals are taxed in retirement.
Thrift Savings Plan (TSP)
Available to federal employees, including military personnel, the TSP operates similarly to a 401(k) and offers several investment options.
Flexible Spending Account (FSA)
Healthcare spending. This account is funded with pre-tax dollars through your employer, and the funds can be used for eligible medical expenses. However, unlike an HSA, funds not used within the plan year are typically forfeited.
Pay ZERO Taxes
(sometimes)
529 Plans
Education savings plan. These state-sponsored plans offer tax advantages for saving for education expenses. While contributions are not federally tax-deductible, investment growth is tax-free, and withdrawals for qualified education expenses are also tax-free.
Health Savings Account (HSA)
Paired with a high-deductible health insurance plan, an HSA lets you save pre-tax money for medical expenses. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
Deduct More
Traditional IRA
Retirement savings account. Contributions to a traditional IRA are often tax-deductible, reducing your taxable income for the year you contribute. Earnings grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.
SEP IRA (Simplified Employee Pension IRA)
Retirement savings account. Geared towards self-employed individuals and small business owners, a SEP IRA allows you to contribute as both an employer and an employee, with contributions being tax-deductible.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Retirement savings account. Mainly for small businesses, both employers and employees can contribute to a SIMPLE IRA. Employer contributions are tax-deductible, and withdrawals in retirement are taxed.
Tax-advantaged accounts are just one tool in your arsenal when it comes to a complete financial plan.
Depending on your goals, there are many different choices that will fit into your unique approach.
By contributing strategically, you can use compound growth to your advantage while reducing your tax implications or at least delaying them.
It can be complicated to pick and choose what you need, and what approach to stick with as time goes on.
That’s what we’re here for.
Talking to a financial professional can take a lot of the pressure off. Instead of being responsible for keeping up to date on tax law, the markets, and long-term projections, you can simply bring your goals and assets to a manager that will do all that for you.
Take the first step today.
Oh, and for a comprehensive review of your personal situation, always consult with a tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give tax advice.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan.