Every spring, Americans engage in the annual ritual of preparing their income tax returns for the previous year. Over the course of a lifetime, the average American will pay $339,1731 in income taxes. So, as you prepare your own tax return, you might be interested in a way to potentially lower the amount you pay — one that’s completely legal and could increase your future retirement income.
The advantages of “tax-advantaged” saving
Your employer-sponsored retirement plan offers you a “tax-advantaged” way to save for the future. Here’s what that means. With the pretax contributions your account offers, the money you put into your account comes out of your paycheck before your taxes are calculated and deducted, which may lower the amount of income taxes you pay with each paycheck. Also, any earnings your investments generate are tax deferred. In other words, the amount you would have paid income taxes on each year and any generated earnings gets reinvested in your chosen investment options and may generate additional growth. The future withdrawals you will make in retirement are then subject to taxation. With Roth contributions, you pay taxes on the amount you initially contribute, but future eligible withdrawals aren’t taxed — and that includes any earnings your investments may have generated.
Keep in mind that the IRS limits2 how much you can contribute to your account each year. But by increasing your contribution amount to that limit, you can potentially increase your future retirement income and benefit from tax-advantaged saving.
Why not take action now to make future income tax filings a little less painful? Log in to your account today and consider raising your contribution amount.
1 USA Today, “IRS tax season 2021: How much will you pay in taxes over a lifetime?” usatoday.com/story/money/2021/04/01/irs-tax-season-2021-how-much-do-you-pay-taxes-over-lifetime/7016671002/.
2 IRS, “Retirement Topics – Contributions,” irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions.