Tax Deferral -A Qualified 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, you are able to deduct $1000 from your taxable income this year and invest it into an interest bearing account, and in return, this deduction allows you to pay approximately $200 less in income taxes for the current year. You now have $200 more than if you had not invested the $1000. If you add the $200 you deferred in taxes to the $1000 you have already invested, you now have $1200 growing in your investment.
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.
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.
Anyone with earned income, and the non-working spouse of anyone with earned income, can open up their own IRA and contribute up to $2000 a year. Your accrued earnings are not taxed until you begin withdrawing money from the account. However, withdrawals cannot be made without penalty before age 59 ..Even if your contributions do not qualify for a tax deduction, your earnings are still tax deferred.
Under the IRA schemes, there are different investment options, but it all depends on the custodian of the money. It is with the IRA that you will have the maximum options as compared to the other employer sponsored investment schemes.
The Keough Plan is open to people who are self employed or who work for unincorporated businesses. By this plan you can contribute up to 25% of your income every year with a maximum of $30,000. All the contributions become tax deductible and your earnings tax deferred. You can contribute more with this plan than with an IRA plan. There are three types of Keough plans, whereby you can contribute a fixed percent every year, or a variable percent or a fixed amount according to you every year. A lawyer can best assist you in setting this 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. - 23199
For example, you are able to deduct $1000 from your taxable income this year and invest it into an interest bearing account, and in return, this deduction allows you to pay approximately $200 less in income taxes for the current year. You now have $200 more than if you had not invested the $1000. If you add the $200 you deferred in taxes to the $1000 you have already invested, you now have $1200 growing in your investment.
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.
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.
Anyone with earned income, and the non-working spouse of anyone with earned income, can open up their own IRA and contribute up to $2000 a year. Your accrued earnings are not taxed until you begin withdrawing money from the account. However, withdrawals cannot be made without penalty before age 59 ..Even if your contributions do not qualify for a tax deduction, your earnings are still tax deferred.
Under the IRA schemes, there are different investment options, but it all depends on the custodian of the money. It is with the IRA that you will have the maximum options as compared to the other employer sponsored investment schemes.
The Keough Plan is open to people who are self employed or who work for unincorporated businesses. By this plan you can contribute up to 25% of your income every year with a maximum of $30,000. All the contributions become tax deductible and your earnings tax deferred. You can contribute more with this plan than with an IRA plan. There are three types of Keough plans, whereby you can contribute a fixed percent every year, or a variable percent or a fixed amount according to you every year. A lawyer can best assist you in setting this 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. - 23199
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 @ 2:55 AM
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