Tax-deferred retirement plans give investors the opportunity to defer taxes on investment earnings until retirement. Pre-tax earnings can be reinvested, greatly compounding the amount of interest you earn from your investments. Some of the most common types of tax-deferred retirement plans include the following:
401(k) Plans
These plans give employees the ability to place a portion of their salary into a company-sponsored investment account. Taxes are deferred on earnings from the plan until they are withdrawn. In addition, contributions to the plan are deducted from your ordinary income. Employees are given several options for investing the money in their 401(k)s. Most 401(k) plans have matching employer contributions.
Keogh Plans
Keogh plans are tax-qualified retirement plans for the self-employed and their employees. Contributions are deducted from ordinary income.
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to see the annual benefit limits for a Keogh or defined benefit retirement plan. In a Keogh plan, the self-employed individual controls which investments are bought and sold in the plan. Income earned from plan investments must be reinvested in the plan, and it grows tax-deferred.
Individual Retirement Accounts (IRAs)
Available to any person with earned income, these tax-deferred retirement plans are directed by the employee. IRA contributions may be fully or partially tax-deductible, depending on the taxpayer's (and/or spouse's) income and participation in an employer-sponsored, tax-favored retirement plan. As with tax-qualified retirement plans, IRA investment earnings are tax-deferred until withdrawn at retirement.
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for a table of the annual contribution limits and catch-up contributions for IRAs.
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Another strategy investors use to shelter themselves from taxes is tax swapping. A tax swap consists of two parts. First, the investor sells a security that incurred a capital loss. Second, the investor buys a similar security, which the investor believes to be a better investment, to replace it. By swapping securities, the investor offsets his or her portfolio gains with a loss while leaving the portfolio essentially unchanged. Repurchasing the same, or substantially identical, security within 30 days of its sale is called a wash sale and eliminates any tax deductions from the security's capital loss.
Tax planning can be very much worth the effort, but a word of caution is in order: The proper use of any strategy can be more complex than it appears. Please consult your tax advisor before implementing any specific investment strategies to discuss their tax implications.
The Retirement Consulting Group (RCG)—an experienced team of retirement consultants who understand the nuances of retirement planning—is designed to supplement the relationship you have with your financial professional. Contact RCG  for all of your rollover and retirement related questions.
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