Tax Advantages
Most retirement (the exception being most non qualified plans) plans offer significant tax advantages. Most commonly the money contributed to the account is not taxed as income to the employee, but in the case of employer provided plans, the employer is able to receive a tax deduction for the amount contributed as if it were regular employee compensation. This is known as pre-tax contributions, and the amounts allowed to be contributed vary significantly among various plan types. The other significant advantage is that the money in the plan is allowed to grow through investing without being taxed on the growth each year. Once the money is withdrawn it is taxed fully as income. There are many restrictions on contributions, especially with 401(k) and defined benefit plans that are designed to make sure that highly compensated employees do not gain too much tax advantage at the expense of lesser paid employees.
Currently two types of plan, the Roth IRA and the newly introduced Roth 401(k), offer tax advantages that are essentially reversed from most retirement plans. Contributions to Roth IRAs and Roth 401(k)s must be made with money that has been taxed as income, but after meeting the various restrictions, money withdrawn from the account is tax-free.
Read more about this topic: Retirement Plans In The United States
Famous quotes containing the words tax and/or advantages:
“But the tax collector, standing far off, would not even look up to heaven, but was beating his breast and saying, ‘God, be merciful to me, a sinner!’”
—Bible: New Testament, Luke 18:13.
“To say that a man is your Friend, means commonly no more than this, that he is not your enemy. Most contemplate only what would be the accidental and trifling advantages of Friendship, as that the Friend can assist in time of need by his substance, or his influence, or his counsel.... Even the utmost goodwill and harmony and practical kindness are not sufficient for Friendship, for Friends do not live in harmony merely, as some say, but in melody.”
—Henry David Thoreau (1817–1862)