
What is a Tax-Advantaged Account?
Brookline, NH Resident Looks to Understand This Frequently Used Term
A tax-advantaged account refers to any type of investment or savings account that is either exempt from taxes, tax-deferred, or offers some other type of tax savings unique to the type of account. The way these accounts work vary significantly, but all will offer some type of tax advantage. Some of the most common include retirement plans, education plans such as a 529, and health plans like a Health Savings Account (HSA).
A Brookline resident kept hearing references to tax-advantaged accounts, but he was unsure of what type of accounts would fall into this category. Wanting to make the most of his own tax savings opportunities, he inquired with Merrimack Tax Associates for a better understanding of how he could utilize tax-advantaged accounts.
The Benefits of Tax Advantaged Accounts
These types of accounts offer some type of tax advantage, saving you money in the short or long-term on the amount you pay in taxes. This may be skipping taxes entirely on your investments or just deferring until your income falls into a lower tax bracket. Whether skipping the tax bill entirely or simply deferring to be taxed at a lower rate, there is significant tax savings in investing in these types of accounts.
Tax-Deferred vs. Tax-Exempt vs. Tax-Free Accounts
The type of investment or savings account you utilize depends on how your money will be taxed. With tax-deferred accounts, you can put off the tax bill until you begin to withdraw the money. This is typically seen in retirement plans, with the idea that your income will fall into a lower tax bracket when it is time to withdraw the money. Tax-exempt accounts require the taxes on your money to be paid up front, but then the money can grow over time tax-free. Some retirement plans offer this type of advantage. Tax-free accounts, commonly 529 plans and HSAs, allow you to deduct the taxes on this invested income, without having to worry about paying future taxes if the money is used for qualifying expenses as laid out by the type of account.
The Brookline resident now has a better understanding of how to maximize tax-advantaged accounts and where to invest his money for the most savings. He can now rest assured knowing that his money is invested wisely, while reducing his tax bill.