A tax deferred retirement plan is an investment plan that allows us as tax payers to invest pretax dollars into a plan, and collect income within the plan without paying tax as long as the funds are left in the plan. This is an excellent way for individuals to save for retirement using income that is only taxed when the money is withdrawn from the plan. The usual mantra is to invest in these plans when you have a high income and are attracting more income tax, then withdraw income when you are making less income. You still will pay tax, but at a lower rate of tax. The theory is that there will be a net savings for the tax payer and in many cases this is true.
Consumers can build up huge retirement savings by using pretax dollars when invested wisely with diversity in mind and in quality stocks and bonds. There will be wide swings in the actual value of the plan since stocks and mutual funds will vary a great deal, however if you are well invested in high quality dividend paying stocks, the value of your investment plans will continue to increase over time. This increase will be from both income from dividends and interest as well as appreciation of these investments.
Tax Deferred Retirement Plan – What to do With Tax Refunds
Consumers can save thousands of dollars with pretax money by using a tax deferred retirement plan. They can save much faster with pretax dollars than they could with after tax dollars. If they are in a high tax bracket they can save or reduce their tax payable by a significant amount. Withdraw the money when they are in a lower tax bracket after they have retired. Tax refunds that are triggered due to investing in a tax deferred plan should always be invested. Invest into these plans or use the funds to reduce other debt such as mortgages and loans.
For example, $10,000 invested in a tax deferred retirement plan would trigger a $5000 tax savings for a person at a 50% tax bracket. Therefore the cost to the tax pager is only $5000. Later when he retires he can begin to withdraw money. Let’s assume now that he is in a 25% tax bracket and withdraws the same $10,000. He will only pay $2500 in tax for a net tax reduction of $2500. This is the real power of a tax deferred retirement plan. Tax planning and income planning is something that your tax adviser or your income adviser can help you with. Determine the best time to withdraw money from your plans.
All income in the tax deferred retirement plan is tax sheltered until it is withdrawn from the plan. This is a really powerful method for consumers to save money for their retirement! Begin early in your life by saving money in a tax deferred retirement plan. It is quite easy to accumulate well over a million dollars in the plan for your retirement. Save for retirement even if you have a company sponsored retirement plan. With a tax deferred retirement plan as well you will have the confidence of knowing that your retirement is financially secure.
Why Should You Invest in a Tax Deferred Retirement Plan when you Have a Company Plan
Many lucky people to have a company pension. Consumers ask themselves why should they save additional money in a tax deferred plan. Turns out there are a number of reasons to save in one of these plans over and above the savings you get from decreasing your taxes.
These reasons include the following:
- Not all pension plans are sufficient to provide the quality of life you may want to have in retirement.
- Many companies do not survive long enough to provide a pension
- Not all companies pay sufficient money into the company pension plan
- Early layoffs and retirements can mean a lower pension than planned
Assume that none of these things mentioned above occur. The real bonus is that you have a savings plan sitting there. It can be used to provide you with a better quality of life than you were expecting. We really are suggesting that consumers should plan for the worst. In most cases the worst does not happen. You gain the benefits of having a savings plan to use for improving your quality of life during your retirement.