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Many financial planners advocate the benefits of having a diverse financial portfolio that includes a mix of tax deferred investments – and for good reason. Deferring taxes can be a highly effective tool when it comes to your financial investments. Today, there are several tax-deferred investments that can provide a sound long-term strategy for setting aside money in which to save for retirement.
The term tax deferred simply means that you’ll pay taxes at a later date, typically in retirement when you’ll need the income. Investment and retirement savings accounts that are considered tax deferred typically include traditional IRAs, Roth IRAs, and a variety of 401(k) plans – including those that cover self-employed persons. There are also many insurance-related vehicles, such as tax deferred annuities and certain life insurance contracts that may also provide tax-deferred benefits.
Thanks to the magic of compound interest, the contributions that you make in your tax deferred investment accounts allow you to grow both your principal and any addition earning that you may have accumulated, tax deferred. This means that your money grows at a faster rate, making a big difference in the growth of your nest egg.
An additional benefit to tax deterred investments is that the contributions in your tax-deferred accounts are often made at a time when you’re earning a higher income and are typically subject to a higher tax rate. So when you comes time to retire and begin withdrawing income (distributions) from your tax-deferred accounts, you may find yourself in a lower tax bracket and paying less income tax on your withdrawal than you would have when you originally invested your money.
At Protective Life, we think that the more you know about your financial investments the better. This video explains the basics of tax deferred investments, allowing you to make sound decisions regarding your financial future.