The tax on the interest, dividends or capital gains are paid later when you withdraw the funds or take possession of them. So, with interest, dividends or capital gains, you still pay tax but at a later date.
Individual Retirement Accounts (IRA's) and deferred annuities are the two most popular Tax Deferred schemes.
How Do I Benefit from using Tax Deferred Retirement?
There are 2 clear benefits to Tax Deferred Retirement plans:
- Tax Free Investment Fund: Clearly, the first benefit is that you have access to a tax-free investment fund. As tax is 'deferred' until a later date you can capitalize on the full amount of the earning invested and subsequent interest re-invested over the years.
- Tax Percentage Paid: This is where you can really save big bucks! As you know, you pay more of your earning in tax as you earn more. If you are savvy, you will invest into a Tax Deferred Retirement plan whilst you are earning more and paying tax at higher tax rates. Then, when you retire and your income is low, you withdraw funds from the Tax Deferred Retirement plan and only pay tax at the lower rate, this could save you 30% tax and more. No, think of $50,000.00, it's not a huge amount of money when saved over your working career (we hope you save far more). So, say you paid 40% tax on that $50,000.00 as earned, that would be $20,000.00 in tax (nice!), now, if you paid 10% tax on that $50,000.00 you would pay $5,000.00. That's an amazing saving of $15,000.00 in your pocket before we add the interest received on your investment.
How should I invest in Tax Deferred Retirement?
There are a number of ways of investing in Tax Deferred Retirement plans. What you are looking for are investment plans whose interest, dividends and captial gains pay out frequently. Why? Investment plans that pay out frequently will give you tax free interest which you can reinvest and provide accelerated growth on your investment. the best two Tax Deferred Retirement investments are:
Tax Deferred Retirement Mutual Bonds/Bonds
What you need to know about Mutual Bond investments:
- Capital Gains: are distributed annually to all shareholders
- Government and Corporate bonds pay regular interest that would be subject to Federal Tax, but isn't due to your Tax Deferred Retirement plan (that is assuming you don't withdraw until a later date when it will be subject to Federal Income Tax)! All the interest is yours to re-invest.
You can calculate how Tax Deferred Retirement affects your tax payments here, simply select the advanced tax calculator and enter your Tax Deferred Retirement details
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