This is the sixth post in my “Taxes for Your Family” series.

I’m always surprised when people don’t take advantage of tax-advantaged retirement accounts. Don’t they realize it’s the best deal Uncle Sam has going?

Calculating Taxes Up And Down -  Tax Benefits of Saving for Retirement, tax advantages of retirement accounts, tax benefits of retirement plans

Here are four ways saving in a retirement account is better than regular savings or brokerage account:

1. Save Taxes Now

If you save $4,000 in a traditional 401(k) or IRA you reduce your taxable income by the same amount. If your effective tax rate is 25%, you have reduced your income tax liability by $1,000. Who doesn’t want that?

You don’t get this benefit with a Roth IRA, but you do get others.

2. Save Taxes While the Money is in the Account

There are no capital gains taxes on retirement accounts.  So, if you buy and sell some investments during the year (or your investment advisor does), you won’t owe taxes on any profits (or capital gains).

If you had the same investments in a taxable brokerage account, you might pay capital gains taxes each year (assuming you have profits).  A little bit each year siphons money from the total and adds up over time.  This is a benefit of both a traditional IRA and a Roth IRA.

3. Save Taxes in Retirement

When you withdraw money from a traditional retirement account, you pay income tax on the withdrawal.  This is because you did not pay taxes on the contribution.

We don’t know what income taxes will be in the future, but if you are not earning income when you withdraw money from your retirement account you will likely be in a lower tax bracket than you were when you deposited it.

Roth IRA accounts are funded with post-tax dollars, so normal withdrawals are income tax free.

4. Free Money!

If you are saving in a company 401(k) and your employer matches a portion of your savings contributions; that is free money.  Take it!

If you are eligible for the IRS Saver’s Credit (income limits apply), you could get a tax credit of up to $1,000 (or $2,000 for married filing jointly).  Consult your tax advisor.


Everyone has heard that they *should* be saving for their retirement.  These are some of the reasons why it is financially smart to do so in a dedicated retirement account.

Photo credit: kenteegardin via photopin cc

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Sara Stanich and not necessarily those of RJFS or Raymond James. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Investing involves risk and investors may incur a profit or a loss. You should discuss any tax matters with the appropriate professional.

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Sara Stanich

Sara is a CERTIFIED FINANCIAL PLANNER™ practitioner, Certified Divorce Financial Analyst, and founder of Cultivating Wealth.

She lives in Montauk, NY with her husband, 3 kids and Labrador puppy.
Sara Stanich

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