One of the most proactive ways you can protect your personal finances is to take advantage of tax beneficial accounts. Though these accounts are typically tied to retirement savings, this is not always the case. At Putnam Bank we want to help you make the most of your money by explaining these account options:
Health Savings Account (HSA): Currently tied to your insurance provider, this account allows you to save pre-tax income in an interest bearing account. The funds within this account can be rolled over annually, and are meant to help supplement the cost of various medical and childcare needs. However, there are limits on how much you can save for this account, the 2017 limit for an individual is $3,400 per year, and $6,750 for a family. You can access these funds using a debit card or written check to cover qualifying expenses outside of your insurance offerings. Another great perk of this account is that it can be invested. Work with a financial adviser to invest in mutual funds, stocks, and bonds to help your money mature, and grow your funds even more.
Work Sponsored Retirement Account (401k): Many companies now offer this account as a corporate benefit. By automatically withdrawing pre-tax dollars from your monthly income, you are able to save for retirement before you even receive your paycheck. The funds you contribute, along with those matched by the company, can then be invested into a variety of options, pushing your money to continue multiplying. Since these funds are meant to act as a retirement savings, any early withdrawals have a 10 percent penalty in addition to the income taxes due. However, once you reach age 59 ½, you can begin taking regular distributions from this employer-sponsored plan.
Individual Retirement Account (IRA): This is a great example of a non-work sponsored retirement account. Generally offered in two versions, the Roth IRA and the Traditional IRA, both offer various tax incentives so you get the best bang for your buck. Each account has a contribution limit of $5,500 a year, or $6,500 for those age 50 or better.
- In a Traditional IRA you contribute pre-tax dollars into an interest bearing account, which can then be invested into an array of opportunities to expand growth. If you remove funds from this account prior to age 59 ½ you will incur a 10 percent early-withdrawal penalty along with paying State and Federal taxes. At age 70 ½, the account requires you to begin taking minimum distributions. This retirement savings option is open to anyone, with no immediate requirements.
- With a Roth IRA there is no age requirement for distributions, and after five years, you can withdraw as much as you like up to the total amount of contributions. The only amount you cannot withdraw is the interest earned after contributions. The main tax benefit with a Roth IRA, opposed to the Traditional IRA, is that contributions are post-tax dollars, but distributions bear no tax. This means if you are at a higher tax bracket upon retirement, you do not have to pay additional taxes to withdraw those funds, potentially keeping more of your savings. This account option does have an income limit, which disqualifies single filers whose adjusted gross income is more than $132,000, and $194,000 for joint filers.
Start maximizing your money and look into your account options today! Our experienced team will answer any questions you have, and help you choose the best account to get the most value out of your long-term savings.