Tax Free Ways to Grow Your Retirement

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 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 free or tax deferred dollars. Each year, the IRS sets a limit on the maximum allowable contribution. For 2016, the maximum contribution is $5500 or $6500 if you are 50 years old or older. 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 You pay no taxes until it’s withdrawn.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 make an annual withdrawal beginning at age 70.

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 Neither your contributions nor the earnings are taxed when withdrawn at retirement.

Learn exactly how much money you will need to retire comfortably with my early retirement calculator.

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 The contributions and earnings are taxed when withdrawn from the 401(k) at retirement.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 goes 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 an investment.

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.




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


Phil Town is an investment advisor, hedge fund manager, 2x NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • Robert T. Bockel

    Tax deferral is not tax savings

    • David

      Always ROTH. Unless it’s company match in 401k then it has to be traditional. But always ROTH your money…

  • Sandra Do

    I have also considered contributing to a non-deductible IRA after maxing out my regular one. I understand it can be converted to a ROTH through the back door and thus grow with no further tax. Phil, do you have thoughts on this option?

  • Bob P.

    These are good points. The Roth IRA is an awesome strategy.

  • al jones

    wtf? no shit sherlock to this whole article.

    • Mike B (Mike B.)

      So, did Mama and Papa Jones forget to teach you some manners? Obviously you were looking for other information and this article is probably not geared toward you.