Tax Deferred Investment Options

by Michelle Strait

In 2010, 54 million retirees, disabled workers and their dependents received Social Security benefits. The U.S. Social Security Administration (SSA) says beneficiaries will increase to nearly 55 million in 2011. If the Social Security Fund can't withstand the yearly increases, future retirees could face reduced benefits. More Americans are preparing for retirement by considering tax-deferred investments. Investment earnings are taxed when you withdraw the money, which means your investment potentially grows tax-free for years.

Employer Sponsored Plans - Non-Government

Employer-sponsored plans such as the 401k or 403b are available to some employees --n depending on the workplace. The 401k is a tax-deferred investment option offered by some private companies. Once you enroll in your company's plan, your contributions are automatically deducted from your pay before taxes are withheld. Some companies match the amount of your contribution, which doubles the contributed amount. The 403b is similar to the 401k, but the 403b is a tax-deferred investment option for employees of educational institutions and some non-profit organizations. Both the 401k and the 403b allow you to choose where you want to invest, such as in a money market fund or a stock market fund. The Internal Revenue Service (IRS) has rules about how much you can invest, how long you must invest and the penalties for early withdrawal. For instance, you might pay an additional 10 percent tax on your 401k earnings if you make an early withdrawal. Carefully read the information provided in your plan's information packet.

Employer Sponsored Plans - Government

Federal and state employees have access to the 457 Retirement Plan or the Thrift Savings Plan. The 457 Retirement Plan is a tax-deferred investment option for state and municipal workers. Employees of some tax-exempt organizations are eligible as well. When you participate in the 457 Retirement Plan, your employer invests a portion of your salary into a retirement account. The money is deposited with pre-tax dollars, and you don't pay taxes on your investment until after you withdraw the money. According to Nationwide, there isn't a minimum retirement age with a 457 Retirement Plan. You're also not charged a 10 percent tax penalty for early withdrawal. The Thrift Savings Plan is another tax-deferred option that works the same as the 457 Retirement Plan. The difference is that the Thrift Savings Plan is for federal government employees and members of the uniformed services. Uniformed services includes organizations such as the Army, Air Force and Marines. Consult a tax adviser or attorney for specific questions about these plans.

Individual Retirement Accounts

An individual retirement account (IRA) is a tax-deferred retirement savings account. You pay taxes on your contributions when you make withdrawals following retirement. You can choose between three types of IRA: traditional, savings incentive match plan for employees (SIMPLE) and Roth IRA. You must learn the specifics about each type of IRA to see which one fits your needs. For instance, contributions to a traditional IRA are tax-deductible, but interest, dividends and gains are taxed at withdrawal. On the other hand, contributions to a Roth IRA aren't tax-deductible, but withdrawals are sometimes tax-free based upon IRS rules at the time of withdrawal.


Annuities are tax-deferred investment options offered by insurance companies. You make contributions to your annuity, and the insurer makes payments to you at a later date. Your contributions grow tax-free, but withdrawals are taxed as income. Tax penalties and insurance company charges might apply if you make early withdrawals. The three types of annuity are: fixed, indexed, and variable. A fixed annuity guarantees the insurance company will pay you a specified rate of interest while your account is growing. According to the U.S. Securities and Exchange Commission, an indexed annuity credits you with a return based on changes in an index. The variable annuity allows you to invest in a variety of options, such as mutual funds. Your returns depend on how well your investment choice performs.

About the Author

Michelle Strait is a professional writer with over five years of experience. She has written for several publications, including "Writer's Digest." She has also created logic puzzles for "Penny Press Magazine." Strait graduated from the University of Alabama with a bachelor's degree in journalism and English.

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