Tax Deferral as an Investment Strategy
Deferring taxes on your income is an investment strategy in which income taxes are paid at a later date for money invested now. The benefit of tax deferral is that it provides more money for you to invest now.
For example, you are able to deduct $1000 from your taxable income this year and invest it into an interest bearing account, and in return, this deduction allows you to pay approximately $200 less in income taxes for the current year. You now have $200 more than if you had not invested the $1000. If you add the $200 you deferred in taxes to the $1000 you have already invested, you now have $1200 growing in your investment.
Another type of tax deferral used by investors is the deferment of taxes paid on interest earned. The dollars invested have already been taxed, but any interest earned is tax free.
The accounts for the tax deferred amount that you create will be safe from being taxed till a later stage in your life when you start withdrawing money from that account, at a time when you fall under a lower tax bracket. The Investment Vehicle or plan that you select must be chosen with care and depends on your unique situation.
One available plan is the 401 (k). This vehicle is available only through employers who offer the plan. It allows you to make tax-deductible contributions that grow tax deferred until you withdraw them. Depending on your particular plan, your 401(k) plan may come with a bonus. Some employers match your contributions. You could make 25%-100% on your money instantly if your employer offers matching funds.
This plan helps you to contribute a larger amount to your retirement plan than any other such plan. You can contribute up to $9,500 and your employer can match that with up to $30,000 annually. You can also arrange for the bonuses that you receive to be directly added to this plan to help grow your investment money faster. If you wish to retire from the job or plan on acquiring more freedom with the kind of investment you make, you could easily roll over your assets into an IRA. The 401(K) plan is the best suited for the newbie at investing and those who do not know where and when to invest their money in.
The 401(k) is the best suited plan for somebody who is new at investing or does not know what kind of stocks to invest in.
Another type of plan offered by an employer is the 403 (b). This plan is for public school and non-profit organization employees and it is tax deductible and tax deferred. You can contribute up to $9,500 of your annual gross income each year to this plan.
However, with the 403(b) plan, you need to beware of some risks. The money you contribute is usually invested in an annuity that is sheltered from tax, but this will have high sale charges and their rates will not have much guarantee.
Anybody who earns an income or the spouse of somebody who earns any kind of income can have their own IRA and contribute to that yearly to a maximum of $2000. The earnings that you make are not subjected to tax till you start withdrawing from it, however a penalty will be charged if you are less than 59 and a half years of age. Even though the money might not be tax deductible, the investment will be tax deferred.
There are different kinds of investment that you could make with your IRA, but that depends on the custodian. However it is with the IRA that you will have most options compared to the other employer sponsored schemes.
The Keough Plan is another such plan that is available for people who are self employed or who work for businesses that are unincorporated. Under this plan, you get to contribute up to 25% of your income every year with a maximum of up to $30,000. You can contribute most with this plan than any other IRA plan, and all your earnings become tax deductible and tax deferred. There are options to choose from in this plan, that is, you could choose to pay according to a fixed percentage every year or a variable percentage or a fixed amount. A lawyer should be best able to guide you in what suits you the best.
The Simplified Employee Plan or the SEP is the other type of investment vehicle available. However, this scheme is open only to those business companies that employ les than twenty five people and at least half of them have to be a part of this plan. Under this plan, you can contribute up to $7,000 and the employee ca pay the rest with a maximum of $30,000.
All the above described investment vehicles fall under one of these two categories: Qualified or Non - Qualified plans.
The 401 (k) and 403 (b) plans are qualified plans. Qualified plans are employer-sponsored plans that provide good benefits but that are restricted to the types of investment options offered by the employer. As we already mentioned, 403 (b) plans often require you to invest your money in tax sheltered annuities. 401 (k) plans generally offer a broader range of conventional investment options, but still seem very limited when compared to non-qualified plans. You usually get to select from a preset choice of investment options such as fixed interest annuities, money market funds, stock in your company, and other traditional investments.
The second category of retirement plans is nonqualified plans. Nonqualified plans generally allow more freedom as to when, or if, a contribution has to be made, and they also offer more latitude in the type of investments that can be made. All IRAs fall into this category. Generally, investors have more control over their investments in a nonqualified plan than with a qualified one. Usually they are easier to work with, have less regulation, and require less reporting. Often, contributions to these plans can be deducted as a business expense.
Most investments made with the vehicles we have been discussing fall into one of two asset categories: The first is debt and the second is equity. As an investor, you are either an owner or a creditor. Equity owners are entitled to all free cash flows that exceed the debt payment obligations of the underlying economic entity. Creditors receive priority in agreed-upon future interest and principal payments.
When choosing a retirement plan, you want to be certain of the types of investments permitted with your plan. Do not open an account that does not give you the freedom to choose your own investment options, whether they are debt or equity investments. - 23208
For example, you are able to deduct $1000 from your taxable income this year and invest it into an interest bearing account, and in return, this deduction allows you to pay approximately $200 less in income taxes for the current year. You now have $200 more than if you had not invested the $1000. If you add the $200 you deferred in taxes to the $1000 you have already invested, you now have $1200 growing in your investment.
Another type of tax deferral used by investors is the deferment of taxes paid on interest earned. The dollars invested have already been taxed, but any interest earned is tax free.
The accounts for the tax deferred amount that you create will be safe from being taxed till a later stage in your life when you start withdrawing money from that account, at a time when you fall under a lower tax bracket. The Investment Vehicle or plan that you select must be chosen with care and depends on your unique situation.
One available plan is the 401 (k). This vehicle is available only through employers who offer the plan. It allows you to make tax-deductible contributions that grow tax deferred until you withdraw them. Depending on your particular plan, your 401(k) plan may come with a bonus. Some employers match your contributions. You could make 25%-100% on your money instantly if your employer offers matching funds.
This plan helps you to contribute a larger amount to your retirement plan than any other such plan. You can contribute up to $9,500 and your employer can match that with up to $30,000 annually. You can also arrange for the bonuses that you receive to be directly added to this plan to help grow your investment money faster. If you wish to retire from the job or plan on acquiring more freedom with the kind of investment you make, you could easily roll over your assets into an IRA. The 401(K) plan is the best suited for the newbie at investing and those who do not know where and when to invest their money in.
The 401(k) is the best suited plan for somebody who is new at investing or does not know what kind of stocks to invest in.
Another type of plan offered by an employer is the 403 (b). This plan is for public school and non-profit organization employees and it is tax deductible and tax deferred. You can contribute up to $9,500 of your annual gross income each year to this plan.
However, with the 403(b) plan, you need to beware of some risks. The money you contribute is usually invested in an annuity that is sheltered from tax, but this will have high sale charges and their rates will not have much guarantee.
Anybody who earns an income or the spouse of somebody who earns any kind of income can have their own IRA and contribute to that yearly to a maximum of $2000. The earnings that you make are not subjected to tax till you start withdrawing from it, however a penalty will be charged if you are less than 59 and a half years of age. Even though the money might not be tax deductible, the investment will be tax deferred.
There are different kinds of investment that you could make with your IRA, but that depends on the custodian. However it is with the IRA that you will have most options compared to the other employer sponsored schemes.
The Keough Plan is another such plan that is available for people who are self employed or who work for businesses that are unincorporated. Under this plan, you get to contribute up to 25% of your income every year with a maximum of up to $30,000. You can contribute most with this plan than any other IRA plan, and all your earnings become tax deductible and tax deferred. There are options to choose from in this plan, that is, you could choose to pay according to a fixed percentage every year or a variable percentage or a fixed amount. A lawyer should be best able to guide you in what suits you the best.
The Simplified Employee Plan or the SEP is the other type of investment vehicle available. However, this scheme is open only to those business companies that employ les than twenty five people and at least half of them have to be a part of this plan. Under this plan, you can contribute up to $7,000 and the employee ca pay the rest with a maximum of $30,000.
All the above described investment vehicles fall under one of these two categories: Qualified or Non - Qualified plans.
The 401 (k) and 403 (b) plans are qualified plans. Qualified plans are employer-sponsored plans that provide good benefits but that are restricted to the types of investment options offered by the employer. As we already mentioned, 403 (b) plans often require you to invest your money in tax sheltered annuities. 401 (k) plans generally offer a broader range of conventional investment options, but still seem very limited when compared to non-qualified plans. You usually get to select from a preset choice of investment options such as fixed interest annuities, money market funds, stock in your company, and other traditional investments.
The second category of retirement plans is nonqualified plans. Nonqualified plans generally allow more freedom as to when, or if, a contribution has to be made, and they also offer more latitude in the type of investments that can be made. All IRAs fall into this category. Generally, investors have more control over their investments in a nonqualified plan than with a qualified one. Usually they are easier to work with, have less regulation, and require less reporting. Often, contributions to these plans can be deducted as a business expense.
Most investments made with the vehicles we have been discussing fall into one of two asset categories: The first is debt and the second is equity. As an investor, you are either an owner or a creditor. Equity owners are entitled to all free cash flows that exceed the debt payment obligations of the underlying economic entity. Creditors receive priority in agreed-upon future interest and principal payments.
When choosing a retirement plan, you want to be certain of the types of investments permitted with your plan. Do not open an account that does not give you the freedom to choose your own investment options, whether they are debt or equity investments. - 23208
About the Author:
Do you want to defer taxes on your income with an investment strategy then, here is the website http://www.weknowthewayback.com of Don Burnham who is an entrepreneur, author, real estate investor, teacher and speaker.
posted by X - Men @ 3:46 AM
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