**Assuming you are investing in the stock market for the long term, and not adjusting for inflation.
Note: The return on an employer match into a retirement account, if your employer offers one, is 100%!! (see below)
We are based in the US, and because that is what we are familiar with, this article applies to the US only. There are tax advantaged accounts in other countries, but we aren't knowledgeable about them so we can't help explain specifically, sorry!
The government creates various discounts on your taxes to incentivize certain behaviors of its citizens that lawmakers decide are important. These can be deductions for certain things you buy, like electric cars in some states, or mortgage interest if you own a home. Some of the most significant ones take the form of accounts for specific types of saving, where you will pay significantly less in taxes compared to saving in ordinary accounts. These accounts are used for saving for retirement, college tuition, and healthcare expenses! Saving in these accounts should be one of the highest priority places for you to save, because of how much more valuable your money will be when you take the tax savings into account. Saving in these accounts will result in more money in your pocket!
This is the most common tax advantaged account that most people save within, and probably will be the most important for your overall saving as well. These accounts allow you to either pay no taxes on the money you put into the account (traditional accounts), or instead pay no taxes when you withdraw in retirement (roth accounts)!
Here are all the types of retirement accounts listed by the IRS. We'll discuss the ones we are most familiar with (and probably the most common?) only here. Finding the right account to contribute to depends a lot upon whether your employer offers one of the below options.
To read more about retirement saving topics such as how much to save, read our detailed retirement overview here!
Due to the significant tax savings, the government places annual limits on how much you can contribute to these accounts, so if you miss a year, you will never be able to "catch up" and put money in for that year later. Try to contribute to retirement each and every year, so that you have the most that you can. Starting early is a huge advantage because those extra years mean you can contribute more and have more years of tax advantaged growth!
MOST EVERYONE can have and contribute to one of these accounts! Some of the below accounts you cannot have unless your employer offers them, but most anyone can contribute to an IRA (of either type). You will probably want to contribute to the below company sponsored account first, but if you don't have access, you should try to contribute to an IRA.
Even if you contribute to a company sponsored retirement account like those below, if you can afford to save more, you can also contribute to an IRA IN ADDITION to other retirement accounts and should strongly consider doing so!
Not sure how to choose between roth vs traditional? Check out our detailed guide here. Want to learn more about IRAs, including a detailed guide on how to open one? Check out our detailed guide here.
Many companies will "match" your contributions into one of the above retirement plans (401(k), 403(b), or 457(b)), usually up to a limit which is a percentage of your salary.
As an example, if your employer will match contributions up to 6% of your salary and you make $40,000 a year, then your employer will contribute $2,400 a year, as long as you do the same. So, if you don't contribute at least $2,400 a year to your retirement plan, you are leaving money on the table.
Employer matches are a guaranteed (sometimes 100% if matched dollar-for-dollar) return on your money. You always want to take advantage of this, up to the limit, if you can!
Once you deposit the money into these retirement accounts, you still have to invest it, just like your non retirement money! In most cases, you would invest in stock and bonds as you might in a regular brokerage account. If you are not close to retirement, you probably want to invest more in stocks (higher return over 15+ years). If you are close to retiring, you probably want to invest more in less risky investments like bonds.
If you have a child and you want to save for their future college education, (or your own future education, if you have anticipated plans), you can open a 529 plan which is an account for saving that may only be used for education. If you take it out and don't spend on education, such as college tuition, you will pay a steep penalty. In exchange for this limited use, you won't pay any taxes on the money you take out when it is time to use it. This works similarly to a roth IRA or roth 401(k) above. You can invest the funds into stocks or bonds just like you might with ordinary savings.
These accounts are for saving money for health related expenses only, but with significant tax savings.
You can only use these funds (without penalty) on expenses like:
This website has a full list of qualifying expenses.
If your employer offers these, and your health plan is compatible, they can be a great way to save in taxes on expenses you might already be incurring anyway!
But what's the catch?
You can keep money in the HSA as long as you like, but you must pay a 20% penalty plus income tax if you withdraw before age 65 for non medical expenses.
What about after age 65?
As you can see, this is a really good deal. You'll always have some health expenses and if you keep some money until age 65, you can even use it for other things too if you need it, although it will stretch farther on health expenses.
This is a much less powerful account than an HSA, but still useful for saving taxes on the health expenses you already would have!