Tax-sheltered accounts are some of the most accessible wealth-builders for everyday investors. They’re also under-utilized, evidenced by the alarming number of Americans who report that they’ve saved nothing in retirement accounts.
Saving money has evolved from stuffing cash under the mattress; it’s about making smart decisions that maximize your wealth over time. Some of the easiest and most effective ways are with tax-sheltered accounts, which grow your investments tax-free or tax-deferred — meaning more of your money works for you instead of going to Uncle Sam.
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It’s been nearly 150 years since American Express created what’s widely regarded as the first retirement savings vehicle, a pension plan for disabled workers that was quickly adopted by other companies and offered to workers of all kinds. Today, the options menu has dramatically evolved: Whether you’re planning for retirement, education, or healthcare expenses, there’s an account for you.
Here are five accounts that can help bolster your retirement returns.
Traditional Individual Retirement Account (IRA)
A Traditional IRA is a retirement savings account offering tax-deferred investment growth. Contributions you make to a Traditional IRA may be tax-deductible, which can lower your taxable income for the year. The money in the account grows tax-deferred until you withdraw it during retirement, at which point it’s taxed as ordinary income.
In 2024, you can contribute up to $7,000 per year if you’re under 50, and $8,000 if you’re 50 or older. Anyone with earned income can contribute, but tax deductibility may be limited if you or your spouse have access to a retirement plan at work and your income exceeds certain limits. Early withdrawals before age 59 1/2 may be subject to a 10% penalty and income tax.
Ideal candidate: Individuals seeking to reduce their taxable income now and who anticipate being in a lower tax bracket during retirement.
Roth IRA
Roth IRAs offer tax-free growth and tax-free withdrawals in retirement. Contributions are made with after-tax dollars, so they don’t reduce your current taxable income — but qualified withdrawals during retirement are tax-free.
The contribution limits are the same as Traditional IRAs — up to $7,000 per year, or $8,000 if you’re 50 or older. Eligibility to contribute phases out at higher income levels. For single filers in 2024, the phase-out starts at a modified adjusted gross income (MAGI) of $146,000.
Contributions (but not earnings) can be withdrawn at any time without taxes or penalties. Earnings can be withdrawn tax-free after age 59 1/2, provided the account has been open for at least five years.
Ideal candidate: Younger investors or those who expect to be in a higher tax bracket during retirement.
Read more: Rich, young Americans are ditching the stormy stock market — here are the alternative assets they’re banking on instead
401(k) plans
Arguably the most popular retirement vehicle given its status as an employee benefits staple, the 401(k) allows employees to contribute a portion of their salary pre-tax, reducing their taxable income. The investments grow tax-deferred until withdrawal during retirement.
In 2024, employees can contribute up to $23,000 per year, with an additional $7,500 catch-up contribution allowed for those aged 50 and over. Many employers offer matching contributions up to a certain percentage, which is essentially free money. Early withdrawals before age 59 1/2 are subject to a 10% penalty and income tax.
Ideal candidate: Employees, especially those whose companies offer a match, should prioritize contributing to this plan to maximize retirement savings.
Health Savings Account (HSA)
An HSA is a tax-advantaged account designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. Contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
Eligibility requires being enrolled in a qualifying HDHP. For 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300. Those 55 and older can contribute an additional $1,000. Funds can be withdrawn tax-free for qualified medical expenses at any time. After age 65, withdrawals for non-medical expenses are taxed as ordinary income without penalty.
Ideal candidate: Individuals with high-deductible health plans looking to save for current and future medical expenses, or even as an additional retirement savings vehicle.
529 college savings plans
A 529 plan is a tax-advantaged savings plan designed to encourage accumulating capital for future education costs. Earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses, including tuition, books, and room and board.
Contribution limits vary by state, but many plans have lifetime limits exceeding $300,000. While contributions are not deductible on federal taxes, some states offer tax deductions or credits. Withdrawals must be used for qualified education expenses to avoid taxes and a 10% penalty on earnings.
Ideal candidate: Parents, grandparents, or guardians who want to plan ahead for a child’s education expenses, or individuals planning to further their own education.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
