Have you started planning for retirement but feel unsure about what type of savings plan is the best option given your financial situation? Fortunately, there is one specific type of investment that can help you retire with peace of mind: a tax-advantaged account. This term designates any type of account that is either tax-deferred, tax-exempt, or that provides another type of tax benefit. Here is a closer look at tax-advantaged accounts and how they can benefit you.
Types of Tax-Advantaged Accounts
Tax-advantaged accounts are generally divided into two subcategories: tax-exempt and tax-deferred. Both types of accounts can help you significantly reduce your annual tax payments and thereby increase your savings.
Tax-exempt accounts are beneficial because any withdrawals you make upon retiring aren’t taxable. Instead, after-tax dollars are used to make regular contributions to the account. In the United States, common examples of tax-exempt accounts include:
- Roth 401(k) — This is an employer-sponsored pension or retirement plan that is funded by utilizing after-tax income. Thus, you immediately pay income tax on any earnings you deduct from each paycheck and transfer to this account.
- Roth Investment Retirement Account (IRA) — This type of savings account allows you to make tax-free qualified withdrawals as long as you meet certain conditions. Unlike traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDs).
These types of accounts allow you to immediately enjoy tax deductions on your total contribution. However, any future withdrawals you make from a tax-deferred account will be taxed at an ordinary-income rate. Common examples of tax-deferred accounts include traditional 401(k) plans and traditional IRAs. As the name suggests, income taxes on tax-deferred accounts are “postponed” to a future date. With traditional 401(k)s, which are funded using pre-tax dollars, employers can match contributions.
Another highly beneficial type of tax-deferred account is an annuity. Annuities are customizable insurance contracts that offer you steady, guaranteed income for life upon retirement. The Internal Revenue Service (IRS) treats annuities, which also don’t carry contribution limits, very favorably. Additionally, you can add a special provision or “rider” to an annuity to allow your loved ones (“beneficiaries”) to receive death benefits after you die, either as a lump-sum payment or as regular payouts.
Annuities can also be either fixed or variable. The former type of annuity carries a set rate of return, while the latter has a fluctuating rate that is tied to the performance of underlying investments in the stock market. Therefore, variable annuities are inherently riskier because you can potentially incur substantial losses. There are also often fees associated with annuities, although this type of product can ultimately help you minimize your tax payments. As always, be sure to speak with an experienced professional to receive expert recommendations about tax-advantaged accounts.
Speak To The Annuity Providers At Matador Insurance
Contact the professionals at Matador Insurance to learn more about the benefits of tax-advantaged accounts. We offer a wide variety of insurance products — including fixed annuities — that can help you plan for retirement. If you’re approaching this stage of your life, our experienced agents understand exactly what situation you’re in and can help guide you through every step of the process and provide any missing information. Contact Matador Insurance Services online to get started with annuities today.