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, 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.
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.
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.
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.
The other plan is the 403(b) which again has to be offered by your employer. This plan is meant for employees who work in public educational centers or other non profit organizations. Similarly in this plan the money is tax deductible and the investment is tax deferred and you can contribute up to $9,500 yearly. With this plan however you need to be aware of certain risks. You have to invest the money in a tax sheltered annuity which will result in high sale charges and the rates they give will not always be guaranteed.
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 available to individuals who work for an unincorporated business or are self-employed. You can contribute up to 25% of your earned income up to a maximum of $30,000. All contributions are tax deductible and your earnings accrue tax deferred. You can contribute much more per year with a Keough than with an IRA. You can elect to contribute a fixed percentage annually, a different percentage annually, or a fixed amount which you decide on. There are three types of Keough plans available and a lawyer can assist you in setting one up.
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 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 you opt for a certain retirement plan, you ought to be sure of the investments that are permissible with it. Try to not open an account that will not give you the freedom to select the kind of investment plan that you want, whether they are debt or equity investment plans. - 23200
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.
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.
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.
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.
The other plan is the 403(b) which again has to be offered by your employer. This plan is meant for employees who work in public educational centers or other non profit organizations. Similarly in this plan the money is tax deductible and the investment is tax deferred and you can contribute up to $9,500 yearly. With this plan however you need to be aware of certain risks. You have to invest the money in a tax sheltered annuity which will result in high sale charges and the rates they give will not always be guaranteed.
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 available to individuals who work for an unincorporated business or are self-employed. You can contribute up to 25% of your earned income up to a maximum of $30,000. All contributions are tax deductible and your earnings accrue tax deferred. You can contribute much more per year with a Keough than with an IRA. You can elect to contribute a fixed percentage annually, a different percentage annually, or a fixed amount which you decide on. There are three types of Keough plans available and a lawyer can assist you in setting one up.
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 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 you opt for a certain retirement plan, you ought to be sure of the investments that are permissible with it. Try to not open an account that will not give you the freedom to select the kind of investment plan that you want, whether they are debt or equity investment plans. - 23200
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 @ 3:47 AM
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