When it comes to getting your finances in order and planning for your future, the topic of taking advantage of the tax system in your country is rarely brought up. Which is odd, as this can substantially improve your financial situation, and help you plan ahead allowing you to face unexpected events with ease, or enjoy a better retirement.
Many people in North America have no idea how to leverage the tax code to their advantage, nor how easily they could be saving money through taxes and grow their capital over time.
There are plenty of unique ways to reduce your taxes; for instance, gambling and capital gains losses can often be deducted from any wins or profits, which will turn lower (or offset) any due taxes. You can also report your charitable donations and claim your charitable tax credit to get a tax deduction.
But one the best ways for you to save significant amounts of money through taxes is to use tax-advantaged accounts – and you will quickly realize that there are plenty of them you can take advantage of. Here are some popular ones in North America.
Examples of popular tax-advantaged accounts in the US
- Individual Retirement Account (IRA)
- Health Savings Account (HSA)
Examples of popular tax-advantaged accounts in Canada
- Tax-Free Savings Account (TSFA)
- Registered Retirement Savings Plan (RRSP)
- Registered Retirement Income Fund (RRIF)
Contributing to retirement accounts is probably the best thing you can do to reduce taxes and build savings for the future. While retirement might not be something you want to think about right now, it’s best to plan for it as soon as you can. Planning early for retirement will help you save and invest more money.
It’s actually quite easy to find out how much you can save by contributing to tax-advantaged retirement accounts, using tools like this RRSP calculator (in Canada) or a Roth IRA calculator (in the US). But in any case, it’s never too late to get ready and start saving for your retirement!
Just remember to have a clear retirement plan that takes advantage of all the benefits American and Canadian governments offer – especially through retirement tax-advantaged accounts.
These accounts will definitely help you prepare your retirement while lowering your tax burden. Such accounts usually offer two kinds of tax benefits – they can be either tax-exempted or tax-deferred.
It all comes down to whether you want your tax savings to be realized on your contributions (tax-deferred accounts) or your withdrawals (tax-exempt accounts).
If you’re wondering which account to use, think about: 1) your financial goals, 2) the time frame of your retirement savings, as well as 3) your income. But in most cases, it’s best to maximize contributions to both types of accounts so you can enjoy the benefits of both.
Of course, to choose the right accounts, the pre- or post-tax option isn’t the only criteria to take into consideration. You also need to compare contribution and withdrawal limits, ease of use, as well as investment options available, and be sure you’re eligible to take advantage of these accounts.
A final note
While getting ready for retirement is very important, you can also use other types of tax-advantaged savings accounts to build an ideal tax-optimization strategy. It will also help you plan for other important goals in your life, like your children’s education or your healthcare expenses.
So, start maxing out tax-advantaged accounts to pay fewer taxes and keep more money in your pocket!
Photo Credit: DonkeyHotey