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, 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.
The plan 401(K) is an investment plan that you could opt for. This is however one of the plans that are available only to those employees whose employer makes provisions for it. Such a plan will let you make contributions on an yearly basis which is deductible by tax and grows as deferred tax until you start withdrawing from that account. Your 401(K) plan might come with a bonus, if your employer agrees to add to your account on a yearly basis. Therefore you could make anywhere between 25%-100% on the invested money if your employer matches it as well.
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.
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.
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 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.
A SEP, or a Simplified Employee Plan is easier to set up than a Keough allows you to deduct 15% of your self-employment income, to a maximum of $30,000. As an employee, you can contribute up to $7000 per year to your SEP, and your employer can contribute the rest. SEP plans are only available to companies with 25 or fewer employees, and at least half of those employees must participate in the plan.
All of these investment vehicles fall into one of two categories : qualified plans or 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 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. - 23222
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.
The plan 401(K) is an investment plan that you could opt for. This is however one of the plans that are available only to those employees whose employer makes provisions for it. Such a plan will let you make contributions on an yearly basis which is deductible by tax and grows as deferred tax until you start withdrawing from that account. Your 401(K) plan might come with a bonus, if your employer agrees to add to your account on a yearly basis. Therefore you could make anywhere between 25%-100% on the invested money if your employer matches it as well.
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.
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.
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 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.
A SEP, or a Simplified Employee Plan is easier to set up than a Keough allows you to deduct 15% of your self-employment income, to a maximum of $30,000. As an employee, you can contribute up to $7000 per year to your SEP, and your employer can contribute the rest. SEP plans are only available to companies with 25 or fewer employees, and at least half of those employees must participate in the plan.
All of these investment vehicles fall into one of two categories : qualified plans or 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 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. - 23222
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 @ 3:30 AM
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