7. Retirement Savings Accounts
Although taxpayers of all income levels are eligible to contribute to retirement savings accounts, tax benefits are typically available to middle-income earners. Low-income taxpayers often can't afford to contribute the maximum amount to retirement accounts and high earners are ineligible for tax breaks for certain accounts.
For those who can afford to contribute to retirement savings accounts, however, the benefits can be huge. Contributions to employer-provided 401k accounts and individual retirement accounts are eligible for tax deductions that can reduce your total taxable income.
For example, if you contribute $5,000 to your company 401k plan, the amount of your taxable income drops by $5,000. If you're in the 25 percent tax bracket, that amounts to a savings of $1,250 in federal tax.
Retirement accounts offer more than an immediate tax benefit: As long as you keep the money in the account, it grows tax-deferred. For a regular brokerage account, you'd owe taxes annually on dividends and capital gains payouts, but if you have a retirement account you pay taxes only when you make a withdrawal from the account.
Contributions to a Roth IRA don't qualify for a tax deduction at the time you make the deposit — instead, you withdraw your earnings and contributions tax-free once you're 59.5 years old. Roth IRA contributions come from post-tax income — you pay taxes on your income today, but not in the future.
You don't get the tax break for Roth IRAs like you do for pretax accounts like traditional IRAs and 401k plans. Pretax retirement accounts are funded with income that hasn't been taxed, which means you don't pay taxes upon depositing funds — you pay when you withdraw from the account during retirement.
Photo credit: Getty