Tax-Deferred Accumulation Vehicles

Most retirement specialists recommend taking full-advantage of your company's 401(k) plan and then pursuing IRAs, Roth IRAs, tax-deferred annuities, and other alternatives as you acquire more disposable income. You should also consider purchasing life insurance as soon as you are financially able, as it provides protection for your family in the event of your death.

Whatever your current age or financial situation, it is important to understand all the tax-deferral methods available. When considering and researching these alternatives, retirement specialists recommend finding the right mix of assets to withstand inflation, grow enough to outdistance spending, and provide a steady stream of income.

401(k) plans and 403(b) plans
A 403(b) plan is a tax-deferred retirement program for employees of certain tax-exempt employers, including hospitals and health care organizations, charitable foundations, religious organizations, scientific and research organizations, educational institutions, and others.

• Contributions can be taken directly from your pre-tax paycheck, reducing your taxable salary.
• Contributions and earnings grow tax-deferred until they are withdrawn.
• You pay income taxes on your contributions and earnings when you make withdrawals. (There may be 10 percent penalty on withdrawals made before age 59½, with some exceptions.)
• Your employer may match your contributions.
• You choose how to invest your contributions, depending on the choices in your plan.

• Cash value and dividends grow tax-deferred.
• You may pay taxes on the gain if you surrender the policy.
• Death benefits are generally tax-free to beneficiaries.

• A deferred annuity’s accumulation value grows tax-deferred. Taxes are paid on any gains when withdrawn.
• You receive a guaranteed percentage of interest in a tax-deferred annuity.
• A 10 percent penalty may be assessed if gains are withdrawn before age 59½.
• There are no IRS limits to how much you can contribute an annuity each year.

• You may be able to deduct contributions from your gross income under certain provisions.
• Earnings grow tax-deferred until withdrawal, at which time they are taxed as ordinary income.
• You are required to begin withdrawals no later than age 70½.

• You pay taxes on the amount you contribute, but you don't pay federal taxes on the appreciated earnings when you withdraw them later (providing the account has been in existence for five or more years and the withdrawals are taken after age 59½). Over extended periods of time, the tax-free compounding may be worth more than the upfront tax deduction for a traditional IRA.

• Self-employed professionals and small-business owners can establish the plan as a defined-benefit or a defined-contribution plan. Contributions are tax-deductible.
• Contributions and earnings accumulate tax-deferred until withdrawal, just like a traditional IRA.

• Pre-tax contributions are made by employers, up to the lesser of 25 percent of each employee's total compensation, or a maximum contribution of $40,000. Only employers can contribute to SEP-IRAs.
• Contributions and earnings can grow tax-deferred until withdrawal, at which time they are taxed as ordinary income.