There are a lot of cool things about getting a good job and earning a nice paycheck, but paying taxes isn't one of them. To help you begin to build a nest egg while reducing your tax burden, you can select some investments that also offer tax advantages. You'll feel better knowing that you're taking steps to achieving financial security while keeping Uncle Sam at arm's length.
If your employer offers a 401k plan, you have easy access to an excellent tax-saving vehicle. Money you put into your 401k reduces your taxable income, so you'll pay less in taxes each year that you invest in the plan. Your funds will also earn interest on a tax-deferred basis, so you won't pay taxes on the interest until you begin to withdraw funds, typically when you retire. Because your tax bracket at retirement will likely be lower, this reduces your tax burden.
An individual retirement arrangement, more commonly called an individual retirement account or simply an IRA, is an interest-bearing investment vehicle that enables you to put away money for retirement while offering certain tax advantages. With a traditional IRA, you can deduct your contributions from your taxes up to the limits allowed by the IRS, and interest accumulates on a tax-free basis. A Roth IRA doesn't offer the tax-deductible feature, but you can withdraw your money on a tax-free basis upon retirement.
If you're scrimping and scraping to save for the down payment on your first home, you'll soon be able to take advantage of the tax benefits of home ownership. In the early years of your mortgage, a large portion of your monthly payment goes toward paying the interest. But the good news is that you can deduct the interest on your tax return. You may also qualify for tax credits available to first-time homebuyers.
Municipal bonds are issued by state or local governments as a way to raise capital for their day-to-day operations. The bonds "mature" after a predetermined period of time, typically 10 years. Upon maturity, you'll receive your initial investment plus interest. The interest you earn is exempt from federal taxes, and if you buy bonds issued by the state or municipality where you live, the interest may also be exempt from state or local taxes.
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