Ladies! Building a retirement can feel like a complex puzzle, we got it. Besides: we have something more fun to do, right? But make no mistake, because making smart moves now for your future self is more fun than imagined, in part because you get tax breaks! In other words, a higher net salary. That’s fun, that’s what we want. We’re going to explain to you in this article in great detail exactly how that works. An important piece of this puzzle is the tax advantage in retirement savings and retirement investing. How can you make this work to your advantage?
Sign up for Elfin’s Retirement Special and really get started building your own (extra) retirement!
Is retirement savings or retirement investing deductible?
Yes, and that is more than good news. In the Netherlands, the amounts you deposit into your retirement savings account are deductible from your taxable income. With this, you can save directly on your annual tax return, effectively paying less tax.
Tax benefits in practice
Let’s make this concrete. Imagine you have a gross annual income of €36,000.
Tax without pension contribution:
- €36,000 gross annual income
- Income tax you pay on this amount, in the first tax bracket it is 36.93%
- The exact amount of tax you pay depends on several factors.
Tax with pension contribution
- €36,000 gross annual income
- €4000 pension deposit
- You pay income tax on €36,000-€4000 = €32,000
- You still fall into the same tax bracket 36.93%
- The total amount you pay tax on is lower, and that can save hundreds of dollars.
By setting aside some NOW for a better retirement income later, you will receive more net pay. Well, if that’s not pleasant.
Please note that these examples are for illustrative purposes. How much tax you have to pay depends on many more factors. With this example, we want to explain to you in simple terms how the tax benefit around retirement accrual works.
Disadvantages of retirement savings or retirement investing
Although retirement savings or retirement investing offers tax advantages, there are also disadvantages. Your money is tied up until retirement age and you can’t just touch it, sometimes you have to pay a penalty. So your money is really tied up for later and paid out when you reach state pension age. Moreover, in the benefit phase, you still pay tax on your accumulated capital, but often at a lower rate.
Benefits of retirement savings or retirement investing
In addition to the tax benefit, retirement savings or retirement investing offers a degree of financial stability. You build a financial cushion for your old age, and you decide how much and when to deposit. If you decide to go for retirement investing, you also take advantage of the benefits that investing brings: return on return effect. You invest your money, and in doing so, you may be able to grow your wealth faster than if you only saved.
How do you start retirement savings or retirement investing?
To start building a pension, open a retirement savings or investment account at a financial institution. So make sure you really do open a dedicated retirement account. Nowadays there are many parties that offer this, think in the Netherlands of Brand New Day, Bright, Semmie, Degiro, Peaks and often the traditional banks. But before you start depositing money like a wild cowboy, there are two crucial steps:
- Discover how much pension you are currently accruing;
- Discover how much extra you may accrue with tax benefits.
You can easily find out how much you are currently accruing by downloading your Uniform Pension Statement. Find out how much extra you are allowed to accrue by calculating your annual margin.
What Is Annual Savings?
Annual margin is the amount you are allowed to put into your tax-deferred pension each year. This is the difference between the amount the Internal Revenue Service says you should have been allowed to accrue in retirement and the amount you actually accrued. Are you employed? If so, you may not have additional annual space because you already accrue enough with your employer. Are you independent? If so, it is imperative that you figure out what your annual margin is and start building your own pension.
How do you calculate annual leave?
The annual margin is calculated based on your “pension base. This is your gross annual income minus AOW contribution and any pension rights already accrued. In Elfin’s Retirement Special, we provide examples of tools you can use to calculate your own annual margin. But this can really be a chore sometimes. Scheduling a meeting with a counselor, such as Marlin or Nihal, may be a good idea.
Taking advantage of tax benefits
To take advantage of the tax benefit in retirement savings and retirement investing, enter your annual contributions on your tax return. The IRS then calculates how much you will get back. What you do is you get to deduct your extra pension contribution made from your gross annual salary. So you end up paying less income tax because you pay tax on a lower amount. See again the calculation example above.
Conclusion
Tax advantages in retirement savings and retirement investing are an indispensable element in sound financial planning. By making smart use of tax advantages, you can build up a substantial capital for a comfortable and carefree old age.
