I know, it sounds too good to be true, but in this case it is the real deal. With a little bit of work and sacrifice on your part you can reduce your taxes and increase your savings with money from Uncle Sam and your employer. Contributing to a tax deferred retirement plan earns you money in three ways.
1. Your contributions reduce your tax liability by reducing your taxable income. For every dollar that you contribute to a tax deferred retirement plan your taxable income is reduced by a dollar. As an example, if you are in the 27% tax bracket you will reduce your taxes by 27 cents for every dollar you contribute. It might not seem like much, but it adds up. If you were to contribute $1000 you would save $270 in taxes.
2. Many employers offer to match an employee’s contribution into a tax deferred retirement plan up to a certain amount. If this is the case with your employer, you are guaranteed a 100% return on your money. For example, if you earn $30,000 a year and your employer is willing to match your contributions up to 4% of your annual salary, you will earn an additional $1200 for your retirement account by contributing $1200.
3. Once invested into a retirement account your money doesn’t just sit there. By utilizing wise investment strategies your money will grow over the years. Once again, an example really illustrates the benefit of contributing to your retirement plan. If you were to invest $1200 per month for 10 years and earn a 5% rate of return you would have $15,528 in your account at the end of the 10 years. This is $3528 more than the $12,000 that you contributed over the 10 year period of time.
Unfortunately many people don’t take advantage of the benefits of a tax deferred retirement plan. Don't wait until tax time to start think about this important topic, talk to your employer today about contributing to an employer sponsored retirement plan and don't forget your IRA options. For more information on Individual Retirement Accounts (IRAs) check out this website http://ohioline.osu.edu/mm-fact/0003.html.