Reducing the Savings Account Tax Burden
Money you place in traditional savings accounts is already taxed by both the Federal and State governments. These after-tax deposits lower the amount you have available for savings. Lower deposit amounts also mean lower earnings potential. Then Interest earned on your savings is also taxed. What can you do to lessen this tax burden?
1. Leverage tax-advantaged retirement accounts. Use 401(k), 401(b) and similar programs to deposit pre-tax money into retirement accounts. This way your initial deposits are larger because they have not yet been subject to income tax. This will provide higher earnings on your savings because of the pre-tax contributions. The downside? Your benefits and contributions will be taxed when you withdraw the funds.