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Tax laws allow individuals to save for retirement through tax-deferred accounts, such as Individual Retirement Accounts and employer pension plans. Annuities and real estate investments are also options, but with limitations. Tax penalties are imposed on early withdrawals from retirement accounts.
Tax laws in most countries allow people with earned income to save for retirement by investing part of their wages in tax-deferred retirement accounts. Employers often operate employee pension plans that are generally funded by a mix of employer and employee contributions. There are types of insurance contracts where premiums grow tax-deferred that investors can use to save for retirement, while some people try to raise money for their retirement years by investing in real estate and commodities.
In the United States, taxpayers can invest a portion of their taxable income in accounts called Individual Retirement Accounts. Similar schemes exist in other countries, and contributions are normally tax deductible. Investors only have to pay tax on the funds when withdrawals are made and as long as this does not occur before the designated retirement age, account holders only pay ordinary income tax on earnings. If funds are withdrawn before the designated retirement age, penalties are assessed on both principal and earnings.
Employer pension plans typically involve investing a portion of an employee’s pre-tax earnings in a tax-deferred account containing mutual funds. In many places, employers can make matching contributions to these plans. Some companies allow employees to save for retirement by investing in company stock. To encourage employee participation, employers generally give additional shares to employees who fully participate in such plans. Employer-sponsored retirement plans are generally inaccessible to individuals until they reach retirement age, but in cases where early withdrawals can be made, tax penalties are imposed on principal and interest withdrawals.
Insurance contracts, like annuities, are designed to provide people with a lifetime stream of income. Many investors make annual contributions to annuities to save for retirement. Annuities begin with an accumulation phase, which lasts several years during which the annuity owner can make periodic premium payments. At the end of the accumulation phase, the contract is annuitized and the annuity owner begins receiving monthly income payments. Investors often use annuity contracts as a way to generate supplemental retirement income.
Tax laws often limit people’s ability to invest funds designated as retirement money in purchases of real estate or basic products. Despite the tax benefits available with designated retirement accounts, some investors choose to periodically purchase real estate rather than invest in retirement accounts during their working years and then sell the property when they retire. Investors who are wary of investments like mutual funds and stocks often invest in gold and silver because these products tend to hold their value over time. The proceeds are sold just before retirement age and are invested in liquid accounts from which investors can earn income.
Smart Asset.
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