Tax Deferral as an Investment Strategy
Deferring taxes is the term which means that you get to pay your income tax later for some amount of money that you invest at present, it is an investment strategy. Deferring taxes is advantageous as you can make some money for investing at the present time.
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.
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.
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.
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.
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.
Any person who has an earned income or the spouse of somebody who has an earned income can open their own IRA and add up to $2000 to it yearly. The earnings are not subjected to tax unless you start withdrawing from the account, but you will be charged penalty if you start withdrawing before the age of 59 and a half. However, even if your money is not tax deductible, they 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 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 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. - 23217
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.
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.
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.
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.
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.
Any person who has an earned income or the spouse of somebody who has an earned income can open their own IRA and add up to $2000 to it yearly. The earnings are not subjected to tax unless you start withdrawing from the account, but you will be charged penalty if you start withdrawing before the age of 59 and a half. However, even if your money is not tax deductible, they 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 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 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. - 23217
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 @ 3:35 AM
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