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Put off paying taxes on your savings |
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| Using pre-tax dollars increases your ability to save by lowering your taxes.
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Save with pre-tax payroll deductions whenever you can and allow your
savings to grow protected from taxes. As a public-sector employee, you
probably have the opportunity to make pre-tax payroll contributions to a
457 deferred compensation or a similar program. On your own, you can open an individual
retirement account (IRA), where your savings can grow without your paying taxes. Many of
these programs do not allow you to get at your savings before retirement, unless you pay tax
penalties. Even so, every penny you can protect from taxes now will be worth a lot more
when you finally retire.
You can’t completely avoid taxes on your retirement savings — but you’ll be better off if they
can be postponed until later!
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Meet Michelle. She is 32 and has to pay 25 cents of every $1 of her paycheck in taxes to Uncle
Sam. Because of a raise, she can save an extra $75 per month out of her take-home pay.
- If she puts $75 in a regular taxable account paying 8% interest per year, she would pay taxes on her
interest earnings each year. After 30 years of contributions, Michelle will have $75,339 as a nest egg.
- If Michelle can afford to save $75 out of her take-home pay, she can afford to have $100 of her monthly
paycheck put directly into a tax-deferred 457 program account. The $25 difference is just the tax she
would have paid on the $100 if she’d saved after-tax instead of pre-tax. She would not pay taxes until
she withdrew money from the 457 program. If she contributed $100, after retiring in 30 years, Michelle
could withdraw her money and have $111,777 as a nest egg, after paying taxes.
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