Start planning for retirement now.
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There are no vaccinations to save us from taxes. However, some effective planning can help reduce some of the financial pain.

The two most popular ways to do this are Individual Retirement Accounts (IRAs) and 401(k)s.

If we are talking about a married couple with a taxable annual income of $19,750 to $80,250, you are in a 12% tax bracket. For singles, the range is $9,875 to $40,125.

If you contribute $5,000 to a regular IRA, you will reduce your taxable income by $5,000. That means you will save $600 in taxes. How did that happen? You multiply your tax bracket of 12% by your contribution of $5,000. Multiply any amount of contribution by 12% and you will see how much you have saved in taxes.

The same concept applies to a 401(k) plan. If you contribute $10,000 to your 401(k) you will save $1,200 in taxes.

Regular IRAs

The maximum contribution is $6,000. If you are over age 50 it is $7,000.

The money not only reduces your taxable income, but you don’t pay any taxes on the growth until you take it out. When you eventually take it out it will be added to your taxable income for that year. While it will increase your taxes for that year, you will have had several years of tax deferral and compounded growth on the tax savings.

At age 72 you will be required to take minimum distributions based on the IRS Uniform Distribution Table. If you take distributions before age 59.5 you will pay a 10% penalty to the IRS.

It is best to set up your IRA with an independent custodian such as Schwab or TD Ameritrade. That should avoid most conflicts of interest. The same is true of any advisor you might choose. My suggested minimum criterion in picking a financial advisor is an independent fee-only certified financial planner.

Here is an example of the power of an IRA to build your nest egg. There are no guarantees in these projections, only examples.

If you invest $500 a month ($6,000 a year) for 20 years in your IRA and it compounds at 8% you would end up with a little over $300,000. It takes a lot of discipline and commitment to do this, but in 20 years you will be very happy about it.

Your 401(k) Plan

Many companies have set up these plans and terminated the traditional pension plan. This makes you the employee responsible for retirement planning.

Many companies match your contribution up to a certain percentage. They may match up to 5%.

Whatever the amount, make every effort to contribute at least that much because it is like getting a 100% return immediately on your money.

The maximum annual contribution amount is $19,500. If you are over 50 you can add another $6,500 for a total of $26,000.

Your contribution not only reduces your taxable income, but there is no tax on the growth until you take money out. If you contributed $19,500, you just saved $2,340 in taxes in a 12% tax bracket.

Consider the following scenario that includes no guarantees.

Assume you contribute $1,000 a month, equaling $12,000 a year. Compounded at 8% over 20 years you would have about $600,000.

These examples are simplified versions showing the power of IRAs and 401(k)s.

There are many variables and several books have been written about them.

Vern Hayden is a certified financial planner and the author of “Getting an Investing Game Plan.”