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This is the easiest way to pay less in taxes


Apr. 15, 2014 Market Watch

Do you think discussions of 401(k) investing are boring? Maybe it’s time to think again.

With pensions a rarity these days, even for government workers, you need to do whatever you can to maximize contributions to a 401(k), or similar, tax-deferred retirement plan. If you’re self-employed, an individual retirement account, or IRA, is the way to go, and there are different types to consider, depending on your tax situation.

Some people believe the notion of “retirement” is silly, as today’s work culture suggests you should work until you die. Fine. But you can never be sure what the future holds, and even if your health holds up, you may have to stop working to take care of a spouse or another family member.

Many employers offer 401(k) plans, with the employer matching an employee’s annual contribution up to a certain amount. For example, if your employer has a 3% match, that means you put 3% of your salary into the plan, and the employer pays the same amount on your behalf. So, in this instance, you’re looking at a 100% return during the first year. And your investment is tax-deferred, meaning it’s deducted from your income, lowering your tax bill. Meanwhile, there are no taxes on gains or dividends within your 401(k), and you will pay no taxes until you begin making withdrawals when you retire.

So it’s an easy decision to invest as much as your employer is willing to match. But you must go further.

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