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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Friday, August 04, 2006

The Benefits of Deferring Taxes

It is almost impossible to avoid taxes with most investments, but taxes can be deferred. Deferring your taxes can profit you substaintially over the long term.

IRAs, 401k, 403b, Keogh plans and tax-deferred annuities are all examples tax-deferred investment vehicles. Tax-deferred plans work by allowing interest, dividends and capital gains to accumulate without incurring taxes. Taxes are due when the investment is sold (once withdrawls begin).

Let's say you invest $10,000 in a taxable and tax-deferred account. There is not much of a difference over ten years--approximately $50,000, but once you get to 20 years it is around $80,000 and at thirty years it is about $175,000.

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