Updated: Feb 6
What would you rather invest; $1 dollar or $.70 cents? Intuitively, the more that is invested the more it will grow overtime; particularly if invested long-term. It seems intuitive that you would choose to invest the whole dollar over seventy cents but If you’re not contributing to a tax deferred or tax exempt account, you’re not investing the whole dollar.
Tax deferred or tax exempt accounts allow people to minimize their tax bills and are ideal investment vehicles for long-term financial planning such as retirement.
Tax Deferred Investments
With a tax deferred investment, you avoid paying taxes until a later point in time. This is advantageous because you don’t pay taxes until you take a withdrawal from the account. In other words, your money can grow at an accelerated rate compared to a taxable investment vehicle because you delay paying taxes.
Traditional IRA’s and 401(k)s are common types of tax-deferred retirement accounts. As of 2021, individuals are allowed to contribute up to $19,500 annually to a 401(k) plan or a traditional IRA. (In 2022, these contribution limits increased to $20,500.)
Tax Exempt Investments
Tax exempt investments are free from federal or state tax. Under this investment option, your money grows tax free and you can withdraw the money tax free providing you meet certain age and other requirements.
Roth IRAs, Roth 401(k)s, and HAS’s are examples of popular tax-exempt accounts. As of 2021 an individual can contribute $6,000 to a traditional IRA, annually. Individuals who are age 50+ can also take advantage of catch-up contributions to apply additional funds to a tax deferred or tax exempt account.
Ideally, you can optimize your financial strategy for retirement if you contribute to both types of accounts. When you place your money into a tax deferred or tax exempt investment vehicle, you are allowing your future self to play with the ‘whole dollar’. When you invest in other types of accounts where taxes are applied, you have seemingly not invested one whole dollar due to the tax applications.
Make sure to engage the help of a financial advisor who is a fiduciary to help determine the best and most advantageous approach to your financial strategies.
The Power of Tax Breaks and Investments
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Remember, every, single, dollar, is better in your pocket.
- Dawn & Sarah; Breakthrough Innovations LLC
**As a reminder, Breakthrough Innovations LLC and their founders are not financial planners. When considering official financial planning advise and investment considerations, the help of a professional service should be leveraged. The intent of this document and coaching sessions are to help provide education and insight into the ways that various alternative scenarios could result in different outcomes based on interpersonal changes, interests, and desires. This information and it's contents should not be misconstrued as financial advise, but rather, information to help see the way that financial futures can be modified should different financial behaviors be introduced.**