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Definition of 'Tax-Advantaged'

A tax-advantaged account is a type of investment account that offers certain tax benefits. These benefits can help you save money on taxes and grow your wealth over time.

There are many different types of tax-advantaged accounts, each with its own set of rules and regulations. Some of the most common types of tax-advantaged accounts include:

* **401(k) plans:** These are employer-sponsored retirement plans that allow employees to save money from their paychecks before taxes are taken out.
* **IRAs:** Individual retirement accounts (IRAs) are retirement savings plans that can be opened by anyone, regardless of their employment status. There are two main types of IRAs: traditional IRAs and Roth IRAs.
* **529 plans:** These are college savings plans that allow parents and grandparents to save for their children's or grandchildren's college education.
* **HSAs:** Health savings accounts (HSAs) are tax-advantaged accounts that can be used to pay for qualified medical expenses.

The specific tax benefits that you can receive from a tax-advantaged account will depend on the type of account you have. For example, contributions to a 401(k) plan are made with pre-tax dollars, which means that you can save money on taxes now. The money in your 401(k) plan grows tax-deferred, which means that you don't have to pay taxes on any earnings until you withdraw them from the plan.

IRAs offer similar tax benefits, but there are some key differences. Contributions to traditional IRAs are also made with pre-tax dollars, but the money in your IRA grows tax-deferred. However, withdrawals from a traditional IRA are taxed as ordinary income. Roth IRAs, on the other hand, allow you to make contributions with after-tax dollars. The money in your Roth IRA grows tax-free, and you can withdraw your contributions and earnings tax-free as long as you meet certain requirements.

529 plans and HSAs offer different tax benefits. Contributions to a 529 plan are made with after-tax dollars, but the money in your 529 plan grows tax-free. Withdrawals from a 529 plan are tax-free as long as they are used to pay for qualified education expenses. HSAs allow you to make contributions with pre-tax dollars, and the money in your HSA grows tax-free. Withdrawals from an HSA are tax-free as long as they are used to pay for qualified medical expenses.

Tax-advantaged accounts can be a great way to save for retirement, college, or other financial goals. By understanding the different types of tax-advantaged accounts and the tax benefits that they offer, you can make informed decisions about how to save for your future.

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