Wealth Building Lessons

Saving money and earning interest on it is the cornerstone to financial success. Unfortunately, if you save too much and earn a lot of interest the IRS will want to take its cut. Making sure you take advantage of the tax-advantaged saving strategies will make sure you achieve your financial goals quicker.

A tax-deferred annuity is one such strategy. In such an annuity, premiums can be made in one lump sum or over several years and can provide a regular stream of income. The income grows tax-free until the withdrawals start, thus allowing a long period of tax-free growth.

Another way to achieve similar tax deferred compounding is through the use of 401(k) plans, 403(b) plans and IRAs. These are plans where you can deposit your savings which grow tax-free until you withdraw the amount at retirement. If you invest in a Roth IRA, you pay tax on the deposits but they grow tax-free and there is no tax on the withdrawals at retirement. Five years after opening a Roth IRA, you can even withdraw the deposits (but not the interest earned) tax-free.

One way to earn tax-free income that isn’t blocked until retirement is by investing in tax-free Municipal Bonds. Munis, as they’re popularly known as, are federally tax-free and if you buy Munis in the state you live in, they’re also free from state tax. Some of them offer better rates of interest than CDs in your local bank.

Investing in real estate also has tremendous tax advantages and with it the opportunity to defer taxes on profits indefinitely. However, this type of investment also carries a higher degree of risk and also requires more capital up front to invest in.

As Benjamin Franklin wisely said, “A penny saved is a penny earned”. Just try not to make Uncle Sam a partner in your earnings!

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