Cover Image for Tax-Free Ways to Grow Your Retirement

Tax-Free Ways to Grow Your Retirement

Phil Town
Phil Town

One of the key strategies for growing wealth is to minimize taxes on your money. When it comes to saving for retirement, the more capital you have, the more interest you gain. 

The following are some tax-free ways to grow your retirement tips on how you can save on taxes and grow your retirement at the same time.

Save on Taxes with IRAs

IRAs allow you to save for retirement with tax-deferred dollars. Each year, the IRS sets a limit on the maximum allowable contribution. For 2018, the maximum contribution is $5500 with catch-up contributions of $1,000 for those 50 and over. A traditional IRA allows you to save with tax-deferred money. You pay no taxes until it's withdrawn. You can make withdrawals at age 60 and it requires you to make an annual withdrawal beginning at age 70.

The money placed in a Roth IRA is taxed upfront, but grows tax-free. Neither your contributions nor the earnings are taxed when withdrawn at retirement.

Lower Taxable Income with 401(k)s

Many employers offer 401(k)s which allow employees to save for retirement with tax-deferred dollars. Like IRAs, 401(k)s have a maximum allowable contribution.  A 401(k) has a substantially higher contribution threshold than an IRA does. The contributions and earnings are taxed when withdrawn from the 401(k) at retirement.

BUT there are two horrible things about 401(k) plans. The first is that most plans don’t give you much of a choice on what to invest in, and most are invested in mutual funds. Second, the average fees are pretty high. Be careful when putting money into a 401(k) and try to get a feel for where the money is being invested. You can also ask your company for a “self-directed” 401(k) so you can choose where to put your money yourself.

Here's a short video where I talk about 401(k) risks:

Tax-Free Savings with Health Savings Accounts

Not truly a retirement account but the contributions you make to a health care savings account are tax deductible and earnings grow tax-free. You are not required to use the funds in your account the same year you add them. The account can remain open, and you can continue to contribute to it for many years. They're an excellent way to prepare for medical costs in retirement. All withdrawals used for medical expenses are tax-free.

Open a Plain Old Investment Account

Chances are that not all of your investment capital is going to be pretax dollars. If so, you’ll need one more account for your post-tax excess cash. You can set up a plain old investment account in your name at any brokerage. Any savings you have beyond what you’re putting into your pretax accounts go here.

This account is perfect for cash you get from other things you’re doing to generate money. Things like: real estate rents, cash from your business, inheritance, gifts, and tax refunds. All of it goes here to be allocated to investments.

In the end, everything depends on your specific needs and situation. But, you can use these accounts to your benefit and grow your retirement tax-free. Learn exactly how much it will take to retire comfortably with my early retirement calculator.

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Featured image: Retirement Jar from under a creative commons license.