Written by: Paul Werlin, President, Human Capital Resources, Inc.
Ok, I know. If it sounds too good to be true, than it must not be true. Or there’s a “catch” or some gimmick involved. No one gives away free money. But, in fact, there really are some smart choices investors can make that really do give you “free money.”
First, and foremost, our government gives people incentives to invest for their retirement. Simple Individual Retirement Accounts (IRAs), spousal IRAs and Simplified Employee Pension Plans (SEPs) are just some of the plans that provide ways to save for retirement and get tax breaks. So, how do you get free money? Simple, for every dollar you put in an IRA, (up to $6,000 max and $7,000 if you’re over age 50) you can deduct (with some limitations if you or your spouse is covered by an employee sponsored retirement account), that amount from your gross income when you file your taxes. So, if you’re in a 25% tax bracket and you contribute the maximum of $6,000, you will pay $1,500 less in taxes.
In other words, the IRS is giving you $1,500 towards your retirement by reducing you tax bill by that $1,500. And there’s more. If you meet certain income guidelines, you can also get a tax credit—that’s like the IRS actually paying a portion of your tax bill! With any matters relating to taxes and the IRS, you should always check with an accountant, CPA or tax professional. But, you can also go to www.irs.gov/retirement-plans and get details directly from the IRS.
Another retirement account that far too many people are not taking advantage of is their 401(k). According to the Bureau of Labor Statistics, about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participate. Doing some math, that means roughly 31% of those who have access to a 401(k) are not participating. That means there are literally millions of people that could invest in their company’s 401k but have chosen not to. And it’s estimated that 70% of employers that offer 401(k)s “match” the contribution made by their employees by adding- tax free a percentage of your contribution. So, your company adds 5% to your contribution—that’s free money.
Survey data reveals that the number one reason people do not contribute to their employees 401(k) is that they believe they just can’t afford it. But in reality, when a small amount of your paycheck (as little as $25 or $50 per check) is deducted, you really don’t miss it. And over time, combined with your employer’s contribution, this can add up in a big way. Check with your employer’s HR or benefits area for details.
The last way to get free money is to sign up for DRIPS-Dividend Reinvestment Programs. Some of the most well-known companies in the world have these programs that allow their shareholders to reinvest dividends without fees or commissions, and sometimes shareholders can even buy shares at a discount to the market price. Some brokerage firms operate their own DRIP programs and will do the stock purchase for you, typically at no fee or reduced fees. DRIPS provide investors with a way to save and save money too. Of course, by reinvesting your dividends you won’t have that money to buy other things or stock in other companies. But DRIPs are a great way to build wealth over time. You can find more information on these programs at https://www.dividendinvestor.com/dividend-reinvestment.
No, there are no free lunches. But smart investors do have ways to make the most of their investment dollars and build their wealth over the long haul. Why not do the same?
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