Planning for Retirement - Tax-Deferred Accounts are Your Friend

If you’ve looked into saving for your retirement at all, you know all of the old adages and nuggets of advice from financial planners by heart: start early, budget smartly, and prepare for big expenses down the road. All of these tips are clichéd by now for a reason. They are all smart, basic steps anyone can utilize for a comfortable retirement when they’re done working. Seeking professional help when planning for your retirement is another tip that almost all financial advice columns spout constantly to anyone wanting to retire over the next few decades. All of these tips are great, but there’s one other secret that most financial planners tell their clients to utilize for their retirement: put as much of your retirement fund into a tax-deferred account.

Paying amounts designated for retirement into a tax-deferred retirement account creates a deterrent for you to spend any amount of that fund on an impulse buy because of the tax penalties you are likely to face if you touch the money before a certain time. Depending on the kind of tax-deferred account, if you take money out of the account before you are 59 ½ years old, you could face a tax penalty of ten percent or more from an early-distribution penalty or excise tax. With this tax penalty motivating you to not spend any money from your retirement account, you are much more likely to contribute to it rather than spend it.

Gary Kapanowski, a professional accountant for Moeller Manufacturing in Wixom, Michigan, advocates setting money aside in a tax-deferred account whenever possible.

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