3 Little-Known Perks of Your Retirement Accounts

It's widely recommended to invest with retirement accounts because of their tax benefits. With traditional 401(k)s and individual retirement accounts (IRAs), your contributions are tax-deductible in the year you make them. With Roth 401(ks) and Roth IRAs, you don't need to pay taxes on your withdrawals in retirement.

That's certainly a good reason to use these accounts. You could save hundreds of thousands in taxes with them. But that's not the only reason. There are also a few little-known perks that make your retirement accounts even better.

1. The early withdrawal penalty motivates you to keep your money there

Retirement accounts all have rules on when you can withdraw your money. These vary, but the most common is an early withdrawal penalty if you need to take out money before age 59 1/2. The penalty amount is 10%.

Penalties are normally a drawback, not a perk. In this case, there's a benefit to the early withdrawal penalty: You have an incentive to keep your money invested in your retirement account.

With a standard brokerage account, you can make withdrawals at any time. It gives you more flexibility, but that's not helpful when you're investing for retirement. Every time you make a withdrawal, that's less money you'll have invested, which cuts into your returns.

Let's say you have $30,000 invested early in your career. You decide to take out $10,000 for a down payment on a new car. If you had kept that money invested and it earned 8% per year, then after 30 years, it would've been worth $100,627. Taking money out of your investments has serious long-term repercussions, and retirement accounts help you avoid this.

2. You can make your retirement savings automatic

The best way to save for retirement is to be consistent about it. And the best way to be consistent is to make it automatic.

If you tell yourself you'll save what you can, there's a good chance you'll get to the end of the month without much to save. If you set up automatic retirement savings of $500 per month, you'll quickly get used to that. It will just become part of how you manage your money.

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Retirement accounts are perfect for saving automatically. With a 401(k), you decide how much to contribute, and it's taken right out of your paycheck. With IRAs, you can set up automatic investments with your stock broker.

3. They could get you a deduction on last year's tax bill

It'd be reasonable to assume that if you didn't contribute to an IRA last year, you missed that opportunity to save on your taxes. Luckily, you have more time than you'd think.

The IRA contribution deadline isn't the end of the calendar year; it's the tax-filing deadline. You can contribute to an IRA until April 15, 2024, and deduct those contributions from your 2023 taxes. The 2023 contribution limit is $6,500 if you're under age 50 and $7,500 if you're 50 or older.

You could also contribute to a Roth IRA. Since this type of IRA doesn't let you deduct your contributions, you won't save on your 2023 income taxes. But you'll be contributing more money that you can take out tax-free when you retire.

Everyone needs a retirement fund, and retirement accounts are the best way to build yours. You won't want to take out money early because of penalties, you can make contributions automatically, and you can even sneak in IRA contributions for last year until tax day.