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The Tax Benefits of 401(k), Roth IRA, and Health Savings Accounts

by in Los Angeles Estate Planning Attorney Blog on 20 April, 2014 with 0 Comments

When examining different investment options, a point of consideration for any potential investment are the tax benefits of the investment. In this post I will be examining the tax benefits of three common investment options that many take advantage of; 401(k) plans, Roth IRA plans, and Health Savings Accounts.

Tax Benefits of 401(k), Roth IRA | Estate Planning Lawyer Los Angeles

One of the most common investment vehicles for most people is a 401(k) plan, which is established through your employer. In addition to being a potentially great way to save for your retirement, there are several tax breaks that are available to those who take advantage of a 401(k) plan.

The largest tax break associated with a 401(k) plan is that contributions that are made to a 401(k) plan are not taxable when they are contributed. This means that contributions made to a 401(k) work to reduce an individual’s adjusted gross income. The best benefit of this is that there is a $1:$1 contribution to deduction ratio, which is superior to the percentage-based deductions that are itemized. A second major benefit associated with 401(k) plans is that while the withdrawals from a plan are taxed, they are only taxed at the ordinary income tax level at the time of withdrawal. There is no additional capital gains taxation over that level. Additionally, during retirement when withdrawals are made, individuals are generally at a lower tax bracket.

Smart Investments Can Help in Estate Planning

An increasingly common investment vehicle that many are investing in is a Roth IRA, which also has some substantial tax benefits. While the contributions to a Roth IRA are made from after-tax income, the distributions made from a Roth IRA after 59 ½ years old are tax-free distribution. Capital gains taxes are not paid on any gains made on the Roth IRA account. Additionally, if contribution money is liquidated from the Roth IRA before 59 ½ for some purposes, there will be no taxes or fees on that withdrawal. Some examples of qualified reasons that are tax-free include higher education expenses, buying a home, and hardship circumstances.

A third common investment vehicle is found in the Health Savings Account, which also provides some beneficial tax breaks. Like the 401(k), contributions to a Health Savings Account are made pre-tax, which lowers your taxable income. Also, earnings made on the contributions are tax-free as well. Finally, unlike a Flexible Spending Account, there is no forfeiture date by which funds invested in the Health Savings Account have to be invested.

To conclude, 401(k) plans, Roth IRAs, and Health Savings Accounts all have great tax benefits that allow an individual taxpayer to keep more money in their hands in the long run. Choosing which kind of plan is best for you depends on your situation, but all three provide tax benefits.

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