I’ve written previously about my first experience with retirement planning. Since then, I’ve enjoyed taking steps to help grow and diversify my retirement portfolio while watching those funds increase over time.
One tool in particular that has helped me a great deal is the tax-deferred retirement account; I’ve established several such accounts over the years. A tax-deferred retirement account, such as a 401(k), offers a specific incentive for people to save money for retirement by postponing, or deferring, tax payments on wealth accrued while those funds remain in the account.
In addition, tax deferral can potentially free up more pre-retirement funds you can then use to add to your retirement portfolio in other ways.
What Is the Benefit of a Tax-Deferred Retirement Account?
As explained by personal finance website The Balance, you do not pay taxes on contributions to a tax-deferred account, nor do you pay taxes on any growth within the tax-deferred retirement account. Instead, you pay taxes only on funds you take out of the account as a distribution (usually during retirement). This offers two primary benefits:
1. Money in a tax-deferred retirement account grows tax-free. According to financial services provider J.P. Morgan Wealth Management, this means that “the impact of compounding can be greater, giving your money the potential to grow more over time.”
2. Tax-deferred growth often occurs during the account holder’s working years, when both earnings and tax rates may be higher than those encountered during retirement. This may result in substantial tax savings.
Which Retirement Accounts are Tax-Deferred?
Another great benefit of tax-deferred retirement accounts is that you are not limited to having one account but can have many tax-deferred retirement accounts. Thus you aren’t limited to just one type of retirement account—you can choose as many as suits your needs.
Types of tax-deferred retirement accounts include:
- Employer-sponsored plans: Retirement plans available through an employer include 401(k), 403(b), or 457 plans. Contributions to these plans and any income earned from them are tax-deferred.
- Traditional IRAs: A traditional IRA (individual retirement account) allows an individual to set aside pretax income that can then grow on a tax-deferred basis.
- Annuities: An annuity is a contract between an individual and an insurance company. Annuities typically are meant to provide an income stream during retirement; they also offer death benefits. Funds contributed to an annuity accumulate on a tax-deferred basis.
Should You Have Several Types of Retirement Accounts?
Generally, it is considered wise to build your retirement portfolio with multiple types of retirement accounts. My own retirement portfolio consists of multiple 401(k) plans and IRAs, among other accounts. This method of placing your eggs in more than one basket allows you to:
- diversify your retirement savings;
- blend strategies that utilize before- and after-tax contributions; and
- continue contributing to your retirement portfolio if you have reached the contribution limit on a single account or are no longer eligible to make contributions to a certain type of account.
“When you have a choice of assets to draw from—both taxable and nontaxable—you’ll be giving yourself added financial flexibility and making the most of your income in retirement,” according to Northwestern Mutual, an insurance company that sells annuities.
What Are the Benefits of a Self-Directed IRA?
Both traditional and Roth IRAs may be set up as self-directed IRAs—accounts that provide the same tax benefits as a typical IRA, but with additional advantages.
One of the most important of these advantages is control. A self-directed IRA operates at the sole discretion of its owner. Funds are added, removed, and allocated as you direct.
Another powerful benefit of self-directed IRAs is choice. Unlike typical IRAs, self-directed IRAs allow you to diversify your retirement portfolio more broadly by allocating funds to alternate asset classes such as precious metals and real estate. These alternative assets can help supplement other types of assets in your portfolio, such as stocks, bonds, and exchange-traded funds (ETFs), providing an additional layer of protection against major market disruptions.
When I was the Director of the United States Mint, I saw firsthand the popularity of adding precious metals to self-directed IRAs. Our gold coin demand went up partially because gold coins minted by the United States Mint were eligible by law to be put into self-directed IRAs. I was always an advocate of holding some gold in a diversified portfolio, but because precious metals (especially gold) perform well over the long run, they seem particularly well-suited to retirement portfolios. This inspired me to add a self-directed precious metals IRA to my own retirement portfolio.
Help grow your savings and protect your future with a retirement account powered by physical precious metals. Request a free Gold IRA Kit and call U.S. Money Reserve today for a one-on-one consultation with a knowledgeable IRA Account Executive.