It’s often been said that in life, there are only two certainties: death and taxes.
And while I’ll admit this adage sounds morbid at face value, when you consider your financial future there’s no contesting its validity.
Over the course of our lives, we pay taxes at nearly every turn. Among the most common are the taxes we pay when purchasing goods and services, holding property, and earning income.
While taxes help pay for things that we will need during retirement (like Medicare and Social Security), they can also feel like an obstacle standing in the way of saving for retirement, short-term goals and emergency situations.
One way to evaluate your financial well-being is to understand if you have more of your cash flow each year going to improve your situation or paying the government. If you would like to learn more about how to figure this out we have two other blog posts that will help:
How Much Am I Paying to the Government?
So, what can you do to maximize your savings while still meeting your obligations to the local, state, and federal government?
Well, I’m glad you asked!
Here are a few ideas on how to save more for your future than you pay the government.
Shift to Roth & Traditional IRAs
If you are focused on long-term retirement savings, then an IRA account is one of the best ways to meet your goals.
There are two main types of IRA accounts: Traditional and Roth. The primary difference between a Roth IRA and a traditional IRA is when you pay taxes.
With a Traditional IRA, you generally pay most of the taxes when you start withdrawing funds.
Conversely, with a Roth IRA, you pay the taxes up-front and then withdraw your income tax-free.
There are benefits and drawbacks to both account types. That said, they are still among the best ways to save for retirement because they are relatively low risk, low-maintenance, and allow for tax-deferred growth.
The most important aspect of having either kind of IRA account is making contributions. IRAs have a maximum annual contribution amount and you should aim to hit this number every year (or as often as possible).
Find Hidden Tax Deductions
Sometimes, saving more than you pay in taxes is not about maximizing your savings, it’s about minimizing your tax burden. You’d be surprised how many people miss out on tax credits and deductions that could save them thousands of dollars every year.
At the end of the day, you will still have to pay your dues to the government, but you may be able to cut a huge chunk off of your bill (or add to your tax refund) if you meet the right requirements.
Fortunately, tax software companies (both free and paid) make it relatively easy to find the best credits and deductions to fit your circumstances.
However, you shouldn’t leave all of your taxes up to third-party software. Do your own research to make sure you’re not missing out on any deductions, no matter how large or small.
Take Advantage of an Employer-Sponsored Plan like a 401(k) or 403(b) Account
One of the few retirement savings vehicles that is just as effective as an IRA account is an employer-sponsored 401(k)/403(b).
In fact, a 401(k)/403(b) can help you save even more money for retirement if your employer offers any kind of contribution-matching program. This means that for every dollar you contribute each year (up to a set number), your employer will contribute the same amount.
So, the same strategy applies for a 401(k)/403(b) and an IRA account. You should always try to contribute the maximum amount each year, especially if your employer is willing to match your contributions. You could literally double your retirement savings!
Set Up Automatic Short-Term Savings Withdrawals
Not everybody is focused on retirement savings. Maybe you’re pretty comfortable with your retirement savings plan, but you want your short-term and emergency savings to outpace your tax obligations. This can be tricky, as most people either don’t give much importance to short-term savings, or they forego them entirely.
This is why it is best to take a “set it and forget it” mentality when it comes to short-term and emergency savings. Do you want to invest in upgrades to your property? Do you want to have a set amount ready in case of a sudden loss of income? If so, setting up automatic savings withdrawals is the best way to go.
The Bottom Line
Although it will take some effort, by being proactive and understanding ways to save, you have an opportunity to reduce your tax liability and boost your long-term savings in the process.
So, what tax-saving measures will you be taking advantage of this year? Do you have any other suggestions for saving more for your future than you pay in taxes?