Tax Deferred Investments
Tax deferred investments are not the same as
tax free investments. Many people are confused by the term 'tax
deferred investments' as opposed to tax free investments.
What are tax deferred investments?
The term 'tax deferred investments' is often
used in conjunction with tax advantageous accounts such as
retirement plan accounts, 401k, IRA, college savings accounts
such as 529 or Coverdell Education IRA, annuities, and other
The idea behind tax deferred investments is
that the US government will not tax your investment earnings
now but you will pay the taxes in the future when you withdraw
For example, you put money in your
Traditional IRA and you don’t pay any taxes on any investments
gains until you withdraw some money out of your Traditional
The United States government has recognized
that Social security benefits are declining and the cost of
schools in rapidly increasing. To help you offset those costs,
your absolute best weapon to fight them is tax deferred
investments, which basically means not having to pay any taxes
during the duration of growth, on money you put towards
retirement or School funds.
The above chart demonstrates the advantages
of Tax Deferral. The above amounts of tax deferred investments
are for example only and do not represent actual performance of
any tax deferred investments.
Even though tax deferred investments aren't
exactly tax free investing, the benefit is still nothing to
sneeze at! From the above example, The first person invests
$100 a month at 8%, while the second invests the same amount,
but tax deferred. After 40 years, the first has $190,713 but
the second has a whopping $349,101 (Almost double what the
other guy has) When the second investor takes the money out,
she will be then be taxed, finally, since she invested ‘ tax
deferred.' Still after taxation, he/she still ends up with
$254,844. Which is still 50% more than the first guy has!
Therefore, there is an obvious advantage of tax deferred