As tax season and the end of the year approach, more and more of our client conversations are trending toward questions about taxes – particularly which type of account they should utilize for their retirement, education funding, and medical expenses.

Our income tax system here in the US, much like that of other countries, imposes a penalty on saving. It might seem counterintuitive to penalize people for saving money, but it makes sense when you think about it. Spending money keeps the economy moving, so if you’re going to save rather than spend, the government needs to get their money somehow.

A consumer today pays income taxes on wages earned, plus a second tax on the growth of their savings, resulting in a higher percentage of income taxed. Even though it makes sense, this savings penalty can have a dramatic impact on retirement savings.

To maximize the value of your savings, we recommend these three account types:

1. A tax-deductible, tax-deferred account

These accounts are funded with pre-tax dollars and investments are sheltered from taxes until you take distributions from the account. The most common type of tax-deferred accounts are 401(k) plans, which are a specific type of retirement account granted through your employer. Traditional IRAs, 403(b) plans, and 457 plans are also examples of tax-deferred accounts.

2. A tax-deferred, tax-free account

These accounts are funded with after-tax dollars, so investments are sheltered from taxes while the account value grows, and distributions are tax-free. The most common accounts in this category are ROTH IRAs and 529 plans.

3. A ‘triple-tax-free’ account

One type of account provides a “triple-tax-free” benefit to the investor. A Health Savings Account (HSA) provides tax-deductible contributions, tax-deferred growth, and tax-free distributions for qualified health care expenses. Qualified health care expenses in this case are any medical expenses, including paying insurance premiums.

Not all investment accounts for retirement, education funding, and medical expense are equal, Understanding how to get the most benefit from various account types is especially important while you are still in your accumulation, saving money toward retirement.

Want to talk about how you can maximize your saving by strategically using these three account types? Schedule a free consultation today.