Five reasons to take advantage of tax-deferred retirement savings plans (2024)

FAQs

Five reasons to take advantage of tax-deferred retirement savings plans? ›

Tax-deferred retirement accounts offer a tax-friendly way to save for the future. The key benefits: Contributions are tax-deductible, your money grows tax-free and you won't owe taxes until you make withdrawals.

Tax-deferred retirement accounts offer a tax-friendly way to save for the future. The key benefits: Contributions are tax-deductible, your money grows tax-free and you won't owe taxes until you make withdrawals.

Tax deferral is a financial strategy that allows you to delay paying taxes on the gain in certain investments until a later date. Earnings are reinvested so your money compounds over time, potentially offering stronger long-term outcomes than taxable accounts.

With a traditional individual retirement account (IRA) or 401(k) plan, you don't pay ordinary income taxes on the money you're contributing. Instead, you'll be taxed when you withdraw your savings at then-current income tax rate.

Individual retirement accounts (IRAs) are retirement savings accounts with tax advantages. Types of IRAs include traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.

Deferred Retirement Option Plan Members

It is an optional, voluntary program that allows members to work and receive pay and benefits as an active employee while accumulating service pension payments in a DROP account. Members are considered “retired” for purposes of pension calculations only.

A deferred payment option is a right to operationally defer payment on an investment until a later date. Deferring payment often has certain advantages to paying upfront, such as accruing interest or avoiding opportunity costs, which the owner of that option will usually pay for.

Benefits of a deferred compensation plan, qualified or not, may include tax savings, the potential for investment gains, and some access to pre-retirement distributions.

Some of the best retirement plans, including traditional IRAs and traditional 401(k)s, are tax-deferred. These accounts are considered an ideal place to park long-term investments, since you can escape paying taxes on realized gains for decades.

What are two benefits of a tax-advantaged account? ›

Best Tax-Advantaged Accounts. Save money on taxes by setting aside pre-tax income for health expenses. Make additional tax-deductible contributions at any time. Watch your savings grow tax-deferred while invested.

The main appeal of the after-tax 401(k) plan is that those contributions grow tax-free, similar to a Roth IRA or a Roth 401(k). And like those plans, qualified withdrawals are tax- and penalty-free. The catch is that not all 401(k) plans allow after-tax contributions.

The tax advantages of a 401(k) begin with the fact that you make contributions on a pre-tax basis. That means you can deduct your contributions in the year you make them, which lowers your taxable income for the year. Note that this benefit applies to traditional 401(k) plans, not Roth 401(k) plans.

401(k) Tax Benefits

You don't pay taxes on the money until you withdraw it when you retire. (At the earliest, this is age 59.5.) Second, by not being counted as income, your contributions could put you in a lower tax bracket. The result: your tax bill will be smaller for your having socked away money for retirement.

Contributions to a traditional 401(k) are always tax-deductible. Your contributions to a traditional 401(k) are always tax-deductible, regardless of income. In contrast, contributions to a traditional IRA may or may not be tax-deductible, depending on income and whether you're already covered by a 401(k) plan at work.

The drawbacks of tax-deferred retirement plans are limited access to funds, minimal investment options, and additional taxation upon the death of of a contributor.

Deferred compensation plans are funded informally. There's essentially a promise from the employer to pay the deferred funds, plus any investment earnings, to the employee at the time specified. In contrast, with a 401(k), a formally established account exists.

The major advantages to a tax-deferred annuity are accumulation and security. By putting off taxes until retirement, your annuity portfolio can use that money to maximize its returns. And then, in retirement, you receive a guaranteed income for life.