Tax laws allow people to save for retirement through tax-deferred accounts, employer retirement plans, annuities, and real estate/commodity investments. In the US, individuals can invest in individual retirement accounts, while employer plans involve pre-tax earnings invested in mutual funds. Annuities provide a lifetime income stream, while real estate and commodities can be sold before retirement age for income. Tax penalties apply to premature withdrawals.
Tax laws in most countries allow people with earned income to save for retirement by investing part of their salary in tax-deferred retirement accounts. Employers often operate employee retirement plans which are usually funded by a combination 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 attempt 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 plans exist in other countries and contributions are usually tax deductible. Investors only need to pay tax on 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 If funds are withdrawn before the designated retirement age, penalties are applied to both principal and income.
Employer retirement 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 appropriate contributions to these plans. Some companies allow employees to save for retirement by investing in company stock. To encourage employee participation, employers usually give additional dues to employees who fully participate in such plans. Employer-sponsored retirement plans are generally inaccessible to people until they reach retirement age, but in cases where premature withdrawals can be made, tax penalties are levied on principal and interest withdrawals.
Insurance contracts, like annuities, are designed to provide people with a lifetime income stream. Many investors make annual annuity contributions to save for retirement. Annuities begin with an accumulation phase, which lasts for several years during which the annuity holder can make periodic premium payments. At the end of the accumulation phase, the contract is canceled and the annuitant begins to receive monthly income payments. Investors often use annuity contracts as a way to create supplemental retirement income.
Tax laws often limit people’s ability to invest funds designated as retirement money in real estate or commodity purchases. Despite the tax advantages available with designated retirement accounts, some investors choose to buy real estate periodically rather than investing in retirement accounts during their working years and then selling the property when they retire. Investors who are wary of investments such as mutual funds and stocks often invest in gold and silver because these commodities tend to hold value over time. Commodities are sold just before retirement age and are invested in liquid accounts from which investors can derive income.
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