Believe it or not, the government can actually help you on this one!
- Creating tax deductions for the money you invest
- Growing tax-deferred money within the plan
- Holding off taxes until funds are withdrawn (hopefully, once you are in a lower tax bracket).
Let’s say you invest $1,000 a month in your retirement account and you are in the 40% tax bracket. If you are earning 10% on your investments, after 30 years, you will have $1.58 million in after-tax cash.
This would be comprised of (roughly):
- $1.2 million from the retirement plan ($2 million gross, less 40% in taxes)
- $380,000 from a side fund (created by investing the $400 of monthly tax savings—$1,000 deduction x 40%)
If you had no government help on the taxes and invested $1,000 a month in an investment that earned 10% (6% after taxes), without using a qualified retirement plan, you would have a little more than $950,000.
The retirement plan wins by $630,000 ($1.58 million vs. $950,000).
Invest your tax savings to bump up that net worth! As always, if you have any questions, please contact me.