Tax Deferral -The Best 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, say you manage deducting $1000 from your taxable income in the current year and then you invest that amount into an account that gives you interest. As a result of this, you get to pay around $200 less in income tax for the current year. Therefore you are gaining $200 more as compared to if you hadn't invested the $1000. So if you add the deferred $200 to the already invested $1000, your investment adds up to $1200. The other kind of tax deferral that investors often opt for is deferring the amount of tax to be paid for interest earned. The invested amount is taxed, but the interest earned becomes free of tax.
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.
Investment Vehicles Tax deferred accounts shelter your money from taxes until you begin making withdrawals in the later part of your life, when you're likely to be in a lower tax bracket. The type of investment vehicles best for you depends on your situation.
You could opt for the plan 401(k). This vehicle is open for you only if your employer offers it. This will allow you to make contributions that are deductible by tax but grow as deferred tax until you start withdrawing the money. Depending on your employer, your 401(k) might come with a bonus, when your employers add to your contributions, doubling it. You could make anywhere between 25%-100% on your contributions, if your employer adds to it.
By using the 401(k) planning, you could add more to your retirement plan, than most other plans. You can add around $9,500 to your retirement plan, and your employer can add another $30,000 every year. You can also add the yearly bonuses that you receive to this plan to help your retirement money grow even faster. If you leave your job or wish for more freedom with your money, you can always roll your assets over into an IRA account.
A 401 (K) may work for a beginner at investing, someone who does not know how to invest in stocks or which are the best stocks to invest in.
The other type of plan that has to be offered by your employer is the 403(b). This is only for employees working in public schools or other non profit organizations. For them, money invested in this plan is tax deductible and tax deferred. Here too, you can contribute up to $9,500 on a yearly basis.
With 403 (b) plans, beware of a few cautions. Your contributions are generally invested in a tax-sheltered annuity, which may have heavy sales charges and low guaranteed rates.
Anyone with earned income, and the non-working spouse of anyone with earned income, can open up their own IRA and contribute up to $2000 a year. Your accrued earnings are not taxed until you begin withdrawing money from the account. However, withdrawals cannot be made without penalty before age 59 ..Even if your contributions do not qualify for a tax deduction, your earnings are still tax deferred.
The type of investments you can make with your IRA dollars depends on the custodian, but you generally have many more investment options with an IRA than you do with any of the employer sponsored investment plans.
The Keough Plan is open to people who are self employed or who work for unincorporated businesses. By this plan you can contribute up to 25% of your income every year with a maximum of $30,000. All the contributions become tax deductible and your earnings tax deferred. You can contribute more with this plan than with an IRA plan. There are three types of Keough plans, whereby you can contribute a fixed percent every year, or a variable percent or a fixed amount according to you every year. A lawyer can best assist you in setting this up.
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 mentioned investment vehicles are divided under these two categories: Qualified and 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. - 23221
For example, say you manage deducting $1000 from your taxable income in the current year and then you invest that amount into an account that gives you interest. As a result of this, you get to pay around $200 less in income tax for the current year. Therefore you are gaining $200 more as compared to if you hadn't invested the $1000. So if you add the deferred $200 to the already invested $1000, your investment adds up to $1200. The other kind of tax deferral that investors often opt for is deferring the amount of tax to be paid for interest earned. The invested amount is taxed, but the interest earned becomes free of tax.
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.
Investment Vehicles Tax deferred accounts shelter your money from taxes until you begin making withdrawals in the later part of your life, when you're likely to be in a lower tax bracket. The type of investment vehicles best for you depends on your situation.
You could opt for the plan 401(k). This vehicle is open for you only if your employer offers it. This will allow you to make contributions that are deductible by tax but grow as deferred tax until you start withdrawing the money. Depending on your employer, your 401(k) might come with a bonus, when your employers add to your contributions, doubling it. You could make anywhere between 25%-100% on your contributions, if your employer adds to it.
By using the 401(k) planning, you could add more to your retirement plan, than most other plans. You can add around $9,500 to your retirement plan, and your employer can add another $30,000 every year. You can also add the yearly bonuses that you receive to this plan to help your retirement money grow even faster. If you leave your job or wish for more freedom with your money, you can always roll your assets over into an IRA account.
A 401 (K) may work for a beginner at investing, someone who does not know how to invest in stocks or which are the best stocks to invest in.
The other type of plan that has to be offered by your employer is the 403(b). This is only for employees working in public schools or other non profit organizations. For them, money invested in this plan is tax deductible and tax deferred. Here too, you can contribute up to $9,500 on a yearly basis.
With 403 (b) plans, beware of a few cautions. Your contributions are generally invested in a tax-sheltered annuity, which may have heavy sales charges and low guaranteed rates.
Anyone with earned income, and the non-working spouse of anyone with earned income, can open up their own IRA and contribute up to $2000 a year. Your accrued earnings are not taxed until you begin withdrawing money from the account. However, withdrawals cannot be made without penalty before age 59 ..Even if your contributions do not qualify for a tax deduction, your earnings are still tax deferred.
The type of investments you can make with your IRA dollars depends on the custodian, but you generally have many more investment options with an IRA than you do with any of the employer sponsored investment plans.
The Keough Plan is open to people who are self employed or who work for unincorporated businesses. By this plan you can contribute up to 25% of your income every year with a maximum of $30,000. All the contributions become tax deductible and your earnings tax deferred. You can contribute more with this plan than with an IRA plan. There are three types of Keough plans, whereby you can contribute a fixed percent every year, or a variable percent or a fixed amount according to you every year. A lawyer can best assist you in setting this up.
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 mentioned investment vehicles are divided under these two categories: Qualified and 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. - 23221
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 @ 1:20 AM
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