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5 Smart Ways to Prepare for the Future

By Dan Caplinger - Updated Jan 4, 2021 at 4:09PM

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Make sure you take care of your needs down the road.

Many Americans live paycheck to paycheck, struggling just to meet their immediate financial needs. But if you can break that cycle and start looking at ways to financially prepare for the future, you'll learn that there are many resources available to you to help make it easier. Below, we'll look at five of the best ways you can save for key future financial needs and start moving your financial picture in the right direction.

1. Open an IRA

The simplest way to start saving for the future is through an IRA. With two basic types of IRAs, traditional and Roth, you can get either immediate up-front tax savings or tax-free withdrawals when you need your money in retirement. Along the way, the IRS won't touch your retirement money, letting it grow on a tax-deferred basis and make your future nest egg even larger.

The government encourages low- and middle-income taxpayers to use IRAs by offering a tax credit. Known as the Saver's Credit, this tax break will pay you back as much as $1,000 for single filers or $2,000 for couples who meet its requirements. Even if you don't qualify for the Saver's Credit, however, IRAs are still great ways to think forward.

Stock chart.

Image source: Getty Images.

2. Participate in your 401(k) plan at work

Another method to encourage retirement savings is the employer-sponsored retirement plan. With most employers, the plan is called a 401(k), and it gives you an ability to save money toward retirement on a tax-deferred basis similar to what IRAs provide. However, the limits on contributions are much higher, and making contributions directly through paycheck deductions is more convenient for many savers.

Most importantly, many employers offer matching contributions to employees who put money in their 401(k)s. Employer matches are essentially free money, boosting your total nest egg and giving you an even bigger incentive to put your money to work toward your retirement needs.

3. Think about your health with a health savings account

Health savings accounts are designed to set money aside for your future health needs. HSAs offer the best of all worlds from a tax perspective, letting you contribute money on a pre-tax basis and deduct your contributions, while letting you withdraw money later on a tax-free basis as long as you use the money for healthcare expenses.

HSAs are currently available only in conjunction with a high-deductible health plan, which puts the onus on you to cover a fairly hefty up-front deductible. However, the Trump administration has discussed broadening the use of HSAs, and so it's possible that they'll become more widely available in the future. Having money squirreled away in an HSA offers valuable tax benefits as well as the financial security that its assets provide.

4. 529 plan accounts

If you have kids, then one of the biggest gifts you can give them is savings toward their eventual college expenses. 529 plans allow you to make contributions into a tax-deferred account and distributions for eligible expenses are tax-free.

In addition, many states offer additional incentives for making 529 plan contributions. A handful of states, including Pennsylvania and Arizona, give state tax deductions for contributions to any 529 plan, either within or outside their respective state. Many others limit deductions to contribution to that particular state's plan. Regardless, it's worth looking closely at your plan options to see whether a 529 makes sense for you.

5. Using a regular brokerage account for long-term stocks

Finally, there's benefit to having money available for whatever purpose you want. Withdrawals from the specialized accounts above can bring penalties and other drawbacks, but a regular brokerage account gives you the flexibility you need to spend when you need your money.

The longer you can invest, however, the bigger the benefit of investing in a taxable account. When you invest in stocks that rise in value, you don't owe any capital gains tax on the appreciation in the shares until you actually sell a stock. That can give you the same benefits of tax deferral as a retirement account while still letting you access your money freely when necessary.

Investing for the future is never easy, but the rewards are worth the effort. By taking advantage of these five smart ways to invest, you'll be better able to give yourself and your loved ones the financial security you deserve.

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