Why should the taxpayer continuously have to pay money to Uncle Sam?  Isn’t it about time that Uncle Sam returns the favor?  There are several tax-advantaged vehicles that allow one to pay less tax on their savings. These include 401k plans, IRAs, 529 plans, and gifts to minors. There are terrific tax benefits to using one or more of these ways to save money for retirement or for your child’s education expenses.

Using a 401k plan

Many people are familiar with a 401k. A 401k is a type of retirement plan, in which an employer and an employee both contribute to the account. For example, if an employee puts a percentage of their paycheck into a 401k plan, then the employer will also contribute a percentage of money into the employee’s 401k plan.

The amount that the employer contributes to the 401k plan is dependent on the type of plan that is offered to employees. Some employers will match 100% what the employee puts into the 401k plan, and others will only contribute a portion of the employee’s amount. Whatever the employer matches, it is free money to you and substantially increases your returns. The tax-advantage to a 401k retirement plan is that the amount is contributed before taxes are computed on the paycheck and the individual does not have to pay any taxes until the money is withdrawn during retirement.

Capitalizing on an IRA

An IRA is an Individual Retirement Account. There are several different types of IRAs from which an individual can choose.  An IRA is a personal retirement savings account that allows individuals to easily save money for retirement. As an individual invests after tax money into their IRA, these investments are considered to be contributions, and within limits, they are tax deductible in the year that they are contributed.

The money that is earned and gained in the IRA is tax-free until the money is withdrawn from the account for retirement. The major tax advantage is that an individual can enjoy the ability to place additional “contributions” into the account, and not have the income they earn taxed until the accounts are withdrawn. This is true each year that the money stays in the IRA. IRAs are a very popular way to save additional money that will be needed during retirement. There are special IRAs for small business owners and people that are self-employed.

Educating your children with a 529 Plan

A 529 education savings plan is a way for parents to save money for their child’s education. The contributions to a 529 plan are tax-deferred, and the distribution that pays for your child’s education is not federally taxed.  A 529 plan has tax breaks that are unsurpassed by any other type of college savings plan. This is an easy way for a parent or parents to save for their child’s future college expenses.

Donating a gift to a minor

A gift made to a minor that is under $12,000 is exempt from gift taxes. Each year, each parent can make up to a twelve thousand dollar gift to a minor. A child could receive $24,000 in monetary gifts that is exempt from a gift tax. You can set up accounts to manage the investment income these gifts earn without the child having access to the account, although the child is entitled to access the account when they reach eighteen.

This is a fantastic way to give money to your child without having the money taxed. Many people give gifts to minors for college expenses or to reduce the amount of their estate. These are the four major tax saving vehicles that make it easy to save for college expenses or for retirement.