What is 'tax-deferred'?
Tax-deferred status refers to the investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor takes constructive receipt of the gains. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities.
Breaking down 'tax-deferred'
By deferring taxes on the returns of an investment, an investor benefits in two ways. The first is tax-free growth. Rather than paying tax on the current returns of an investment, tax is paid only at a later date, leaving the investment to grow unhindered. The second benefit of tax deferral extends to investments made during pre-retirement periods when earnings and taxes levied against working wages are typically higher than earnings in post-retirement phases.
Qualified tax-deferred vehicles
A 401(k) plan is a common vehicle offered by employers to grow employees’ retirement savings. Gains attributed to securities held within a 401(k) do not apply to an employee’s taxable income. Contributions to qualified savings plans such as 401(k) accounts are made on a pre-tax basis, reducing taxable income received by the employee.
Withdrawals made from qualified retirement plans are taxed at the investor’s individual tax rate at the time of receipt. Withdrawals for 401(k) plans are generally taken after age 59½ in a 401(k). Most other retirement plans allow withdrawals at age 55. Tax-deferral and employer dollar-matching provisions encourage employees to set aside wages to grow a retirement nest egg and delay receipt of funds to a period when tax rates are expected to be lower.
Non-qualified tax-deferred vehicles
A non-qualified tax-deferred investment does not reduce taxable income, but it does allow capital gains and interest to grow unencumbered. Annuities are a popular insurance product embracing the benefits of tax deferral. While qualified retirement plans such as traditional IRAs limit contribution amounts of $5,500 annually, many annuities do not restrict contribution amounts.
For more information about tax-deferred plans contact one of our CFS Financial Advisors at Denali to learn how a this plan can fit into your investment strategy.
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*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
For specific tax advice, please consult a tax professional.
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