Tough Economic Times|Tough Actions
Do you want to lower your taxable income? Do you want to delay taxation on your retirement investments? Do you want free money?
If you answer yes to one or more of those questions, you should be investing in a tax-deferred retirement plan, such as a 401k or 403b plan. Here’s why:
Lower Your Taxable Income
When you invest in a 401k or 403b retirement plan, your taxable income is lowered by your contribution amounts. You save money on your current income taxes whenever you contribute to your retirement plan; you can’t beat that.
When you invest in a qualified retirement plan (401k or 403b) as long as your investment money remains within that retirement plan, you get to delay paying taxes on that investment money and any growth realized on those investments.
Market, Dividend, Interest
This tax delay holds true regardless of whether investment growth within your retirement account is based on market conditions, dividends or interest payments.
If you realize a gain on your retirement plan investments due to a trade or sale, you are not taxed on that gain as long as you keep your money in your 401k retirement plan.
A slight downside may be if you were to realize a loss due to a sale or trade. You are not allowed to write-off losses realized within a retirement plan account.
Pay Yourself|Pay Taxes
Tax delays are not indefinite. When you take money our of your retirement plan account by taking a distribution or making a withdrawal, you pay taxes.
Non-Retirement Plan Investments
Pay Taxes As You Go
If you are not interested in delayed taxation, just invest outside of a tax-deferred retirement plan.
Investment growth from dividends and interest is reported to the IRS as earnings, you will receive a 1099 and that investment growth will be taxed at your normal tax rate. Those earnings are added to your taxable income for the tax year you receive them.
If you sell or trade investments outside your tax-deferred retirement plan and realize a gain, there is not tax delay, you are taxed in the year of the gain.
You are allowed to take a write-off if you realize a loss on a sale or trade of investments outside of a tax-deferred retirement plan.
Where’s My Free Money
Get A Match|Get Free Money
Investing in an employer sponsored retirement plan (401k) offers the opportunity for an employer match. This means that your employer will give you free money if you make a contribution to your retirement plan. They will put this free money into your retirement plan as an additional contribution.
Many employers offer matching contributions because they feel that you are taking retirement planning seriously so you deserve some investment encouragement. When you are lucky enough to receive the gift of an employer match, take advantage of it.
A Common Match
A popular matching formula used by a lot of employers is a 50% match of your contributions up to 6%. Translation: for every dollar you contribute to your retirement account, your employer will contribute 50 cents. Your employer’s contributions will cap out at 6% of your income. You cannot beat the free money from an employer match.