Choosing Your Savings Vehicles
You have a few different savings options for longer-term goals like retirement and college. Here are a few you may consider:
Employer-sponsored retirement plans: As part of your employee benefits package, you may be offered a retirement plan such as a 401(k), 403(b), or 457 plan, Thrift Savings Plan (TSP), or pension. Your contributions to an employee-sponsored plan aren’t taxed until they’re withdrawn in retirement, and your contributions may even be partially matched by your employer.
Individual retirement accounts (IRAs): IRAs can operate standalone or in addition to an employer-sponsored plan. Depending on the type of IRA you have, you’ll either pay taxes when you contribute (as with a Roth IRA) or when you withdraw (as with a traditional IRA).
529 college savings plans: 529 plans allow you to make large contributions, some with limits beyond $300,000, with withdrawals used for qualified K-12 and college expenses free from federal income taxes. These plans are a great way to save no matter your level of income or timeline for your or your child’s academic career.
Coverdell education savings account (ESA): ESAs let you save for school with a greater variety of investment options than 529 plans. If your gross income is under $110,000 (or $220,000 on a joint return), you can set aside up to $2,000 a year for college or K-12 expenses.
Brokerage accounts: Brokerage accounts allow you to purchase and sell investments, including stocks, bonds and mutual funds, through a brokerage firm. These investments aren’t insured and are subject to taxation, but you may be able to earn more in returns than with other savings vehicles, and you can use the money for any purpose, such as for a vacation or a second home.
Tax Impacts: Tax-Efficient Savings
Saving from an early age means you can accumulate plenty of interest, and careful planning can help you maximize your account’s growth. Did you know, for example, that some accounts are more tax-efficient than others?
A great way to save on taxes is by using tax-deferred accounts. By not paying taxes on these accounts until withdrawal, you benefit in the following ways:
Dividends, interest and capital gains aren’t taxed yearly. You won’t pay a cent on the growth of your savings when they’re tax-deferred—not until you withdraw them.
Money not spent on taxes can be invested. Delaying taxes until later gives you more money to work with right now. You can take advantage of this opportunity and put the money to work by investing it and letting it grow.
You can rebalance your investment portfolio without worry. Retirement plans like a 401(k) or an IRA offer a range of investment choices and are tax-deferred. That means you won’t face immediate taxes if you sell any of your securities from these accounts. Taxable accounts don’t have this luxury, potentially deterring you from rebalancing your portfolio.
You may have a lower income tax rate when you withdraw your money. Many people have a lower income in retirement than they did when they were working full-time. If so, you’ll save on your retirement taxes!
It might feel difficult to stay motivated about saving for a goal that’s years or decades away. When a goal is so far off, you might feel like you can take a break from saving so you can enjoy your money now. However, it’s easy for a few splurges to get out of hand and lead to your goals being significantly delayed. Avoid losing your motivation by following these tips:
Have a defined goal and don’t lose sight of it. When your plan is as vague as “I want to save more” or “I want to go on an extravagant vacation,” you won’t know if you’re making any progress. Put numbers and dates behind everything so you have a goal line to aim for.
Break up goals into micro-goals. Knowing you need to save thousands of dollars can be intimidating, but if you need to save a couple hundred a month or less per week, then suddenly a goal seems much more in reach.
Employ your own “string around a finger.” You may have heard of tying a string around your finger to act as a reminder for yourself. Make your own visual cues to help you remember your savings goal. Maybe it’s changing the background of your computer or phone to a picture of your dream home. Or, you could draw a progress bar on a whiteboard to fill in as you get closer to your goal.
Enlist your friends. Do you spend more money when you’re with your friends? Let them know about your money-saving goals and work together to find more cost-effective ways to have fun. With their support, you can stick to your budget while still enjoying each other’s company!
Have a defined goal and don't lose sight of it. Put numbers and dates behind everything so you have a goal line to aim for.
Checking Your Progress
Remember those micro-goals? Here’s where they come in handy. It’s easy to tell how you’re progressing with your savings if you know exactly how much you should be putting aside each month or each week. Check your progress more frequently as your goal’s deadline approaches. For example, that could be monthly for a mid-term goal or semi-annually for a longer-term goal.
However, what if you do get off track? Maybe you were supposed to have $1,300 saved by month 6, but you only have $900. That’s when you need to reevaluate your spending habits. Check your net income per month. Subtract outgoing money from incoming money and compare that amount to previous months (highlight what goes into savings so you can track that separately). Are the numbers going up or down? Target the areas where you’re spending more and see if you can cut expenses. You can also try earning extra income. If neither is an option, you may need to adjust your goals.
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