Tax Deferral As An Investment Strategy
Deferring taxes is the kind of investment strategy that can be carried out on your income, by which your income tax is paid later in exchange for money invested currently. The advantage of tax deferral is that you get to make more money which you can in turn invest immediately.
For example, you are able to deduct $1000 from your taxable income in the present year and then you invest that exact amount into an account that pays you an interest, therefore you will be able to pay around $200 less in income tax for that year. As a result of this, you are gaining $200 extra as compared to if you had not invested the $1000. Therefore if you add the invested amount with the deferred amount, you are making around $1200 more which is growing as an investment for you. There is also another tax deferral strategy that investors often go for; they defer the tax they have to pay for the interest they are earning. The invested amount thus becomes taxable, but the interest becomes tax free.
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 tax deferred accounts that you may create will protect your money from being taxed until you start withdrawing money at a time when you are entitled to pay less tax. The Investment vehicle that suits you therefore depends on your current 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.
A 401 (k) allows you to contribute much more per year than many of the other retirement plans. You can contribute up to $9,500 to your 401 (k) per year and your employer can contribute up to $30,000 per year. You can also have your bonuses issued as 401 (k) contributions to build your retirement wealth even faster. If you ever leave your employer or wish to have more freedom with your 401 (k) investments, you can always rollover the assets in your account into an IRA.
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.
Under the IRA schemes, there are different investment options, but it all depends on the custodian of the money. It is with the IRA that you will have the maximum options as compared to the other employer sponsored investment schemes.
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 the 403(b) are the plans that are qualified. These are those employer sponsored investment plans that offer good benefits but depend upon the kind of plan that the employer draws up. For example, the 403(b) plan needs you to invest the money in tax sheltered annuities. As compared to this, 401(k) offers a wider selection of more conventional investment options, such as fixed interest annuities, company stocks etc. but is yet restricted as compared to the non - qualified plans.
The non - qualified plans allow more freedom regarding when or if you want to make a contribution. All IRA's are a part of this category. Usually investors find it easier to work with non - qualified plans than with qualified ones, they require less reporting and regulating and investors have more control over their investments this way. Often contributions made to these plans can be deducted from tax as a business expense.
There are also two asset categories, in which all the above vehicle fall into: debt and equity. If you are an investor, you are either the owner or the creditor. Equity owners are available for all the free money flow which exceeds the debt to be paid of the underlying economic body. Creditors will of course be high on priority where agreed upon future interest or the payment of principles is concerned.
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. - 23159
For example, you are able to deduct $1000 from your taxable income in the present year and then you invest that exact amount into an account that pays you an interest, therefore you will be able to pay around $200 less in income tax for that year. As a result of this, you are gaining $200 extra as compared to if you had not invested the $1000. Therefore if you add the invested amount with the deferred amount, you are making around $1200 more which is growing as an investment for you. There is also another tax deferral strategy that investors often go for; they defer the tax they have to pay for the interest they are earning. The invested amount thus becomes taxable, but the interest becomes tax free.
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 tax deferred accounts that you may create will protect your money from being taxed until you start withdrawing money at a time when you are entitled to pay less tax. The Investment vehicle that suits you therefore depends on your current 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.
A 401 (k) allows you to contribute much more per year than many of the other retirement plans. You can contribute up to $9,500 to your 401 (k) per year and your employer can contribute up to $30,000 per year. You can also have your bonuses issued as 401 (k) contributions to build your retirement wealth even faster. If you ever leave your employer or wish to have more freedom with your 401 (k) investments, you can always rollover the assets in your account into an IRA.
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.
Under the IRA schemes, there are different investment options, but it all depends on the custodian of the money. It is with the IRA that you will have the maximum options as compared to the other employer sponsored investment schemes.
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 the 403(b) are the plans that are qualified. These are those employer sponsored investment plans that offer good benefits but depend upon the kind of plan that the employer draws up. For example, the 403(b) plan needs you to invest the money in tax sheltered annuities. As compared to this, 401(k) offers a wider selection of more conventional investment options, such as fixed interest annuities, company stocks etc. but is yet restricted as compared to the non - qualified plans.
The non - qualified plans allow more freedom regarding when or if you want to make a contribution. All IRA's are a part of this category. Usually investors find it easier to work with non - qualified plans than with qualified ones, they require less reporting and regulating and investors have more control over their investments this way. Often contributions made to these plans can be deducted from tax as a business expense.
There are also two asset categories, in which all the above vehicle fall into: debt and equity. If you are an investor, you are either the owner or the creditor. Equity owners are available for all the free money flow which exceeds the debt to be paid of the underlying economic body. Creditors will of course be high on priority where agreed upon future interest or the payment of principles is concerned.
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. - 23159
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 @ 3:39 AM
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