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Under 40? I think this is the smartest financial move you can make

If you’re under 40, there are plenty of smart financial moves you can make. For example, saving for retirement, investing your money, and using tax-efficient accounts to protect your gains from the tax authorities are all very smart ideas.

However, if I had to list the smartest move you can make while you’re still under 40, I’d say it’s opening (and saving into) a Lifetime ISA for retirement. Here, I’ll explain why this particular ISA – which is only open to those aged between 18 and 40 – is so powerful.

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An extra £100,000+ in retirement

The first major advantage of the Lifetime ISA is that it comes with 25% bonuses from the government on contributions of up to £4,000 per year, to age 50. So, if you put in the full £4k while you’re eligible, you’ll pocket £1k for free. This is a phenomenal deal that could really turbocharge your wealth over time.

Consider this hypothetical example. Let’s say you put £4,000 into a Lifetime ISA every year between the age of 30 and 50 and your friend puts £4,000 into a Stocks & Shares ISA every year between 30 and 50. You both invest your money in the same diversified portfolio of stocks that generates a return of 8% per year (these gains will be tax-free in both accounts), and you both leave the money in your respective ISAs until you turn 65.

By the time you both turn 65, your friend’s Stocks & Shares ISA will be worth around £583,000 – which is certainly a healthy amount of savings. However, due to the extra £1,000 you picked up every year from the government between the age of 30 and 50, your Lifetime ISA will be worth a huge £729,000.

That’s a difference of nearly £150,000! Are you starting to see the power of this ISA?

Access your money tax-free

Yet it gets better. The other huge advantage of the Lifetime ISA is that once you turn 60, you can access your money completely tax-free. Don’t underestimate this benefit – it could save you tens of thousands of pounds in tax.

For example, let’s say you’ve just turned 60 and you have £500,000 saved in a workplace pension or Self-Invested Personal Pension (SIPP). You can access this money, but unfortunately, you can only take 25% of it tax-free (£125,000 in this case). Any further withdrawals will be added to your income and taxed at your normal rate.

So, if you wanted to withdraw £25,000 per year for retirement income purposes, you’d most likely be looking at several thousand pounds in tax per year. However, if that £500,000 was saved in a Lifetime ISA, you could take the whole lot tax-free. There would be zero tax payable on lump-sum withdrawals or income withdrawals. Over time, the tax saving could be substantial.

All things considered, the Lifetime ISA is a very powerful investment vehicle. Not only can it potentially boost your wealth significantly, but it can also save you a fortune in tax. If you’re under 40 and eligible to open an account, I think you’d be mad not to.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.