The Advantages of Tax Deferred Growth
Tax deferred vehicles allow you to make investments today and defer paying taxes on investment growth until the funds are withdrawn. This typically occurs in retirement when you may be in a lower tax bracket. Because it could be many years before you need to withdraw these funds, tax deferred accounts allow for many years of potential investment growth without taxation. Contributions made on either a pre-tax or tax deductible basis reduce your current taxable income, potentially allowing you to invest more. And, because growth is tax-deferred, your balance has the potential to increase more quickly than if you had placed your money in a taxable vehicle.
401(k) Accounts: A defined contribution plan offered by a corporation to its employees affording three main advantages. First, contributions come out of your paycheck before taxes, lowering your taxable income. Second, tax-deferred growth and third, the potential for an employer match on your contributions. Annual contributions are limited and participants age 50 and older enjoy a higher limit. Withdrawals are generally subject to ordinary income tax and withdrawals before age 59 ½ may also result in a 10% federal tax penalty.
403(b) Accounts: A defined contribution plan made available to employees of certain non-profit and charitable organizations and affords three main advantages. First, contributions come out of your paycheck before taxes, lowering your taxable income. Second, tax-deferred growth and third, the potential for an employer match on your contributions. Annual contributions are limited and participants age 50 and older enjoy a higher limit. Withdrawals are generally subject to ordinary income tax and withdrawals before age 59 ½ may also result in a 10% federal tax penalty.
Traditional Individual Retirement Account: A Traditional IRA is a retirement investing tool for employed individuals and their non-working spouses that allows annual contributions up to a specified maximum amount. Although all individuals may contribute to a Traditional IRA, whether or not a tax deduction is allowed on the contributed amount depends on the individual's income and whether or not they participate in an employer-sponsored retirement plan. Any withdrawal of tax-deductible amounts is subject to ordinary income taxes, as well as a 10% federal tax penalty if taken before age 59 ½.