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Tax-deferral is a simple way of paying your taxes later rather than paying them now.
Tax-deferred accounts, like IRAs and 401ks, are an important part of any plan that is focused on saving for retirement in a tax-efficient manner. Generally, these types of accounts are funded with pre-tax dollars and grow tax-free until you withdraw the money, which is usually when you reach retirement age.
There are a few things that are generally true when looking at a tax-deferred account:
- Money goes into the accounts pre-tax and decreases an individual's taxable income.
- Funds cannot be taken out until a certain age is reached.
- There are penalties for early withdrawals.
- The accounts are especially useful when holding funds that generate a lot of gains, like actively managed mutual funds, or a lot of income, such as REITs.
Tax-Deferred Account Options
Tax-deferred accounts include:
These accounts can be opened by an individual to help with saving for retirement. The accounts grow tax-free until the account owner turns 73 years old at which point they will need to begin taking required minimum distributions. The distributions will be taxed as income when they come out of the account. The account owner does not need to wait until they are 73 to begin taking distributions though and can begin taking distributions form the account at 59 ½ years old. Any distributions taken before then will be subject to early withdrawal penalties.
These accounts have some similarities with Traditional IRAs but are sponsored by an individual’s employer. These accounts will also grow tax-free until distributions are taken, and required distributions start at age 73. The distributions that come out of the account will be taxed as income when they are taken. There is also a penalty on any distributions taken before 59 ½.
Much like an IRA an annuity can allow for taxes to be deferred until the money is withdrawn, generally with the intention that it will be for retirement income. Annuities differ from IRAs in some key ways though, with a main difference being that annuities allow for more flexibility. Annuities can provide different types of cashflows, provide death benefits, provide cashflow to beneficiaries after the death of the annuitant, and have several other types of features added on as well.
529 Plans are a tax-deferred strategy for funding your children’s college tuition. They are another way to gain tax-deferred growth and the potential for tax-free distributions for qualified educational expenses (though contributions to a 529 plan are generally made with after-tax dollars).
HSAs stand out as being somewhat different from other tax-deferred accounts as their intended purpose is not for retirement purposes but is instead focused on saving for medical expenses.
Working with PNC Investments
Neither PNC Investments nor your Financial Advisor provide tax advice. You should review your tax situation with your own independent tax professional to fully evaluate how you may benefit.
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No service or strategy described here, will prevent the realization of taxable gains from your investments. The services or strategies seek to minimize the current impact of taxes on your account but will not eliminate the eventual realization of imbedded gains from your account. Frequent withdrawals from your account will increase the likelihood of the realization of taxable gains from your account. Additional fees, commissions, or trading charges related to tax management services or strategy may apply. There is no assurance that the benefits of tax management services or strategies will exceed applicable fees, commissions, or trading charges in any given year.
This material is meant to educate and not to provide legal, tax, accounting or investment advice. PNC Investments and its affiliates and vendors do not provide legal, tax or accounting advice.
Important Investor Information: Brokerage and insurance products are:
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Not Insured By Any Federal Government Agency • May Lose Value
Securities products and brokerage services as well as managed account advisory services to US based clients are offered by PNC Investments LLC, a registered broker-dealer and a registered investment adviser and Member FINRA and SIPC. Managed account advisory services for non-US based clients are offered by PNC Managed Account Solutions, Inc., a registered investment adviser. Annuities and other insurance products are offered through PNC Insurance Services, LLC, a licensed insurance agency.
PNC Investments, PNC Insurance Services and PNC Managed Account Solutions do not provide legal, tax, or accounting advice.
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