Let’s be honest. No one looks forward to preparing their taxes and filing them, but everyone is anxious to see what refund money they’ll get back from the government.
Whether you’re getting a sizable refund or paying a decent amount to the IRS, you can’t control the taxes the federal government assesses you. However, you can use some smart tax deferral benefits to your advantage and keep more money in your pocket.
If you don’t know how to take advantage of tax breaks and deductions, you’re sure missing out. Read on for some strategies you can employ to defer taxes.
Traditional Individual Retirement Accounts (IRAs)
One of the best tax deferral strategies is to invest in a traditional Individual Retirement Account (IRA). With a traditional IRA, you can defer taxes on the money you contribute until you retire when you are likely in a lower tax bracket.
Additionally, the earnings on your traditional IRA investments grow tax-deferred, meaning you won’t have to pay taxes on them until you withdraw the money in retirement. This can provide a significant tax advantage and help you grow your nest egg more quickly.
Life Insurance
There are a few things you can do to help make the most of your tax-deferral benefits when it comes to life insurance. One is to keep the money that would have gone towards premiums in a separate account so you can see exactly how much is growing tax-deferred.
Another is to reinvest any dividends you receive back into the policy so that they can keep compounding tax-deferred. Finally, if you have a cash-value life insurance policy, be sure to use it in a way that will maximize your tax advantages, such as using it for long-term care expenses.
By following these tips, you can help make the most of your life insurance policy and maximize your tax deferral benefits.
Health Savings Accounts
Another best way to defer taxes is by contributing to a Health Savings Account (HSA). An HSA is an advantaged tax savings account that can specifically be used to pay for qualified medical expenses or costs.
You can contribute to an HSA on a pre-tax or after-tax basis, and the funds in the account grow tax-deferred. Withdrawals from an HSA are also tax-free as long as they are used to pay for qualified medical expenses.
Non-Qualified Deferred Compensation (NQDC) Plans
Non-Qualified Deferred Compensation NQDC plans allow you to defer taxes on a portion of your income, often until retirement. This can result in major tax savings, mostly if you are in a high tax bracket.
There are a few things to keep in mind when considering an NQDC plan. First, you will likely be required to pay taxes on the deferred income when it is eventually withdrawn. Second, there may be limits on how much you can contribute to the plan. Finally, there may be penalties for early withdrawal.
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Maximize Your Tax Deferral Benefits
When it comes to taxes, deferral is key. By deferring your taxes, you are essentially putting off paying them until a later date. This can be a great way to save money, as you will not have to pay taxes on the money you have earned until you actually receive it.
There are many ways to maximize your tax deferral benefits, and by taking advantage of them, you can save yourself a lot of money.
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