As Mr. Franklin famously said, “...but in this world nothing can be said to be certain, except death and taxes.” He was unfortunately correct, but there are ways of reducing the burden.
There are many who do not realize the benefits of tax deferral, or even what it could mean to their financial health.
According to Investopedia, the definition of the term “Tax Deferred” is: “Investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor withdraws and takes possession of them. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities.”
What does this mean? It means you don’t have to pay taxes today on any of the money you place into a tax-deferred account on tax day. It reduces your taxable income by the amount you’ve contributed, and therefore reduces your year-end tax burden. The tax on this money is postponed until you withdraw it at a later date. Keep the money in these accounts until retirement age (59 ½ years old), and you can withdraw without penalties.
Now, Uncle Sam won’t let you off the hook completely. You’ll still have to pay taxes on this money eventually. But if you don’t touch the money until you retire, chances are you’ll be in a lower tax bracket at the time and will have a lower amount of tax to pay on the same money. And even better, any money you leave in your tax-deferred account has the potential to grow tax deferred with compounded interest!
To take advantage of the benefits of tax deferral:
- Begin contributing or increase your allocation to your workplace retirement savings account, such as your employer provided 401(k) or 403(b). Many employers even match your contributions, which could double your tax-free income.
- If you are self employed or do not have an employee sponsored plan, consider opening an Individual Retirement Account (IRA or Roth IRA). We’ll post more about these account types later in the month.
- Explore Deferred Annuities. Annuities are contracts between you and life insurance companies that provide tax-deferred accumulation and an option to receive a lump sum or fixed periodic payments starting on a specific date.
An annuity offers tax-deferred growth, plus there is often no required distribution age, like other retirement options that require withdrawal at age 70½. This means that your money can continue to grow tax-deferred over a longer period of time.
Annuities also often include a death benefit that passes the account value to your beneficiaries.
For more information about tax deferred solutions, contact your FAS financial professional today.
This information is general in nature and should not be construed as tax or legal advice. Neither Transamerica Financial Advisors, Inc. nor its Representatives may offer tax and/or legal advice. Please consult your tax and/or legal adviser for guidance on your particular situation.