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Maximize Your Savings with Tax-Advantaged Accounts

Are you looking to save more efficiently for your future goals? Tax-advantaged accounts can be a powerful tool to help you achieve your financial objectives while minimizing your tax burden. In this comprehensive guide, we’ll explore the different types of tax-advantaged accounts, their benefits, and how you can use them to your advantage. And remember, for any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to get started.

What Is a Tax-Advantaged Account?

A tax-advantaged account is a special-purpose savings or investment account that offers tax benefits when you save toward specific goals, such as retirement or paying for college. These accounts allow you to reduce your taxable income now, defer paying taxes on earnings until later, or let your money grow tax-free while it’s in your account. By reducing your tax burden, tax-advantaged accounts can help you reach your savings goals faster and more efficiently.

Tax-Deferred vs. Tax-Exempt Accounts

Understanding the difference between tax-deferred and tax-exempt accounts is crucial for effective tax planning:

• Pretax Contributions: These contributions are excluded from your taxable income, reducing your tax liability in the year you contribute.
• Tax-Deferred Earnings: Earnings in these accounts are not taxed until you withdraw the money, allowing your investments to grow without immediate tax implications.
• Tax-Exempt Earnings: Earnings in these accounts are not taxable, either now or later, providing significant tax savings over time.

Types of Tax-Advantaged Accounts

The federal government has created several types of tax-advantaged accounts to encourage taxpayers to save money toward certain goals. Here are six types of tax-advantaged accounts that can help you save money on taxes and grow your savings:

401(k)s and Other Employer-based Retirement Plans

Employer-based retirement plans, such as 401(k), 403(b), and 457 plans, let you contribute to tax-advantaged retirement funds through your work. These plans typically allow automatic payroll deductions and may provide matching funds from your employer, increasing your contributions. A 401(k) can be either a tax-deferred traditional plan or a tax-exempt Roth 401(k).

Individual Retirement Accounts (IRAs)

IRAs are another popular option for retirement savings. There are two main types:

• Traditional IRAs: Contributions are tax-deductible, and earnings are tax-deferred until you withdraw the money.
• Roth IRAs: Contributions are not tax-deductible, but earnings and withdrawals are tax-free.

529 Educational Plans

Tax-advantaged 529 savings plans allow you to save for college or other qualifying educational expenses with tax-exempt earnings at both the state and federal levels. These plans are administered by states, and some states may offer additional incentives for saving in a 529.

Coverdell Education Savings Accounts

Coverdell education savings accounts are designed to help save for college. These accounts allow tax-free withdrawals for qualifying education expenses. Contributions are not tax-deductible, and there are income requirements for contributing parents and grandparents.

Health Savings Accounts (HSAs)

HSAs allow both pretax contributions and tax-exempt growth, as long as distributions are used for qualified health care expenses. These accounts are particularly beneficial for those with high-deductible health plans.

Achieving a Better Life Experience (ABLE) Accounts

ABLE accounts are designed for eligible people with disabilities. These accounts allow for tax-free withdrawals for qualified expenses and can help beneficiaries accrue assets without losing eligibility for benefits like SSI and Medicaid.

How to Invest Tax-Efficiently

Minimizing taxes is a common goal for investors. Here are five strategies to help you invest tax-efficiently:

1. Add Tax-Advantaged Accounts

Tax-advantaged accounts can help you contribute more, keep more of your earnings invested, or avoid paying taxes as your money grows. Choose accounts that align with your specific goals to maximize your tax savings.

2. Make Tax-Deductible Contributions

Consider contributing to accounts that allow pretax contributions, such as traditional IRAs or 401(k)s. Reducing your tax bill immediately can translate into more money to invest.

3. Consider Maximizing Tax-Exempt Accounts

Although you don’t get a tax deduction for contributing to tax-exempt accounts like Roth IRAs or 529 plans, the tax-exempt earnings and tax-free distributions can be a significant advantage when it’s time to withdraw your money.

4. Be Strategic With Earnings and Gains

When structuring or rebalancing your accounts, consider making more profitable trades or generating more income in tax-exempt accounts. This can help you manage your tax liability more effectively.

5. Plan for Taxes in Retirement

Give extra thought to tax planning in your retirement years. Balancing income from taxable, tax-deferred, and tax-exempt sources can affect how much you’ll pay in taxes. Consulting with a retirement financial advisor or tax professional can help you navigate the complexities.

The Bottom Line

Tax-advantaged accounts are a valuable tool for saving money on taxes and maximizing returns. Whether you’re saving for retirement, education, health care expenses, or helping a disabled family member, these accounts can help you achieve your financial goals more efficiently. And for any mortgage service needs, O1ne Mortgage is here to assist you. Call us at 213-732-3074 to learn more about how we can help you with your mortgage needs.

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