Talking About Tax-Deferred Investments
Choosing how to invest your hard-earned cash can be overwhelming because of all the options available to you. The worst thing you can do, however, is nothing.

What is it?
A tax-deferred investment is one for which you pay federal income taxes when you take money out of the investment rather than during the time the money is invested. Any earnings your contributions produce while they remain invested are also tax deferred. Some investments also allow you to invest pre-tax dollars, so neither the contribution nor its potential earnings are taxed until they are withdrawn.

How does it work?
First, since your money is being reinvested and nothing is being taken out to pay taxes, you've potentially got more money to compound and grow. That means when you withdraw the funds, your investment may be larger than a similar investment that is subject to capital gains tax each year. Second, if you're investing for retirement, you may be in a lower tax bracket at the time you withdraw the money than you are now. Because tax-deferred investments are generally designed to help you invest for specific long-term goals (such as retirement or a child’s education), there are restrictions on when the money can be withdrawn without penalty. Early withdrawals may be subject to sales charges and fees. Withdrawals prior to age 59½ may be subject to a 10 percent income tax penalty.

What types are available?
Employer-sponsored plans. One place to start investing for your retirement is an employer-sponsored plan such as a 401(k), 403(b) or 457. These typically allow both pre-tax contributions and tax-deferred compounding. Many employers will also contribute a matching percentage of your contribution into these plans. Check with your employer to determine which benefits are available to you and how you can begin to participate.

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