Have you ever looked at someone you know who has a lot of money and wondered how they got there? Maybe they were lucky; Let’s say they started out with a unique business idea and eventually succeeded. Or maybe they inherited some of their wealth from family.
But you should know that many people with a lot of money achieve this goal by making conscious choices. This includes using the right wealth-building tools. Here are three things you might want to take advantage of.
1. Traditional IRAs
When you contribute to a traditional IRA, you commit to saving and investing for retirement. But the tax savings you enjoy while doing so make it easier to grow your wealth.
Traditional IRA contributions are tax-free, so by funding one of these accounts, you shield some of the income from taxes. This is money you can invest for greater wealth.
For example, if you invest $5,000 in a traditional IRA, you won’t be taxed on the $5,000 in earnings. If you fall into the 22% tax bracket, that’s a savings of $1,100. If you take that $1,100 and invest it instead of spending it, you can build even more wealth. It’s that simple.
2. Roth IRAs
The money you contribute to a Roth IRA will not give you an immediate tax deduction. But you should know that investment earnings in a Roth IRA are tax-free, which alone opens the door to many wealth-building opportunities.
Let’s say you contribute $250 per month to a Roth IRA for 45 years. Compared to the S&P 500, the stock market’s average return over the last fifty years is 10%. If you get the same return in your Roth IRA, you’ll end up with a balance of about $2.15 million—but you only put in $135,000 of your own money. So, you’re looking at a $2 million gain that the IRS can’t touch.
HSAs, or health savings accounts, combine the benefits of traditional and Roth IRAs. Contributions are tax-free, and investment earnings are tax-free, along with withdrawals for qualified medical expenses.
And yes, HSAs are specific to healthcare costs. Withdrawing from an HSA for any other reason could result in an expensive penalty. But there are two caveats here: First, healthcare is an ongoing expense, so think of an HSA as the same as having a prepaid supermarket debit card. You know you need to eat so the prepaid card looks like cash. HSAs are similar in the context of healthcare expenses.
Additionally, although you will generally be penalized for applying to an HSA for non-medical withdrawals, this penalty disappears once you turn 65. At this point, your HSA will function like a traditional IRA; You can take distributions, but you pay taxes on them.
Rich people are not always lucky. Many work hard and use the right tools to build wealth over time. If you want to improve your personal finances and join the ranks of the wealthy, be sure to save for retirement and healthcare in a tax-advantaged account like the ones discussed above. This way, you can benefit from tax deductions throughout your investment career.
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