3 Ways Saving for Retirement Could Help Your Finances Today

Saving for retirement is usually seen as a form of delayed gratification. You choose not to spend some of your money now in exchange for more money when you retire. But that’s an overly simplistic way of looking at things.

While you won’t realize the full benefit of saving for retirement until you actually withdraw your funds, there are still some perks you can enjoy today. Here are three of them.

Image source: Getty Images.

1. You’ll get a tax break if you contribute to a tax-deferred account

Retirement accounts generally break down into two types: tax-deferred and Roth. Roth accounts require you to pay taxes on your contributions now in exchange for tax-free withdrawals in retirement. But tax-deferred accounts offer you an upfront tax break on your contributions. You have to pay taxes on your withdrawals in retirement, though.

What kind of a tax deduction you get depends on the size of your contribution. If you put $5,000 in a traditional IRA, for example, then the government reduces your taxable income for the year by $5,000. It’s sometimes possible to knock yourself down a tax bracket through tax-deferred retirement contributions, which means you’ll owe a smaller percentage of your income to the government.

Most retirement accounts are tax-deferred, including most 401(k)s and traditional IRAs, so they’re not too difficult to find. Roth accounts usually say they’re Roth in the name, so it’s simple to determine when each account requires you to pay taxes.

2. You could earn the Saver’s Tax Credit

The Saver’s Tax Credit is a tax break available to adults 18 or older who aren’t students or claimed as a dependent on someone else’s tax return. Unlike the tax deduction discussed above, this is a tax credit, which means it’s a dollar-for-dollar reduction of your tax bill. That means if you qualify for a $1,000 tax credit and your tax bill for the year was $5,000, you’d now only owe the government $4,000.

The maximum Saver’s Tax Credit for the 2022 tax year is $2,000 for single adults and $4,000 for married couples. But how much you qualify for depends on how much you put into your retirement account and your adjusted gross income (AGI). The larger your income, the smaller your credit, and some people with very high incomes may not qualify for the credit at all.

But if you do, you can shave hundreds or thousands off your tax bill this year. That could result in a smaller amount owed or a larger tax refund when you file your return.

3. You can squeeze more money out of your job if you qualify for a 401(k) match

Some employers offer employees a company match if they’re willing to divert some of their own earnings to their 401(k). The size of this match depends on the company’s matching formula and the person’s salary, as well as how much they choose to put in their retirement account. But in some cases, it can amount to thousands of dollars per year. And that could turn into tens of thousands of dollars over time once it’s been invested long enough.

The same rules apply to your own contributions and any your employer makes on your behalf. You can’t withdraw the funds before age 59 1/2 without paying a 10% early-withdrawal penalty on top of taxes unless you have a qualifying reason. But you’re still squeezing a little bit of extra cash out of your job each year, which can make it feel more worthwhile.

Hopefully, the three tips above give you a little more incentive to set aside some money for retirement this year if you haven’t already done so. You must make any 401(k) contributions by the end of the year, but you can make 2022 IRA contributions up until the tax-filing deadline. Think about which accounts make the most sense for you and plan accordingly.

10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of October 26, 2022

The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts