common-tax-terms

Money Matters: Common Tax Terms

common-tax-terms

Cary, NC — In this issue of Money Matters, Raj Satsangi of Princor Financial Group in Raleigh explains some common tax terms for our readers as April 15 approaches.

Money Matters: Common Tax Terms

If you were asked to identify some confusing financial terms, would tax-deferredtax-exempt and tax-deductible top the list? Taking control of these terms can have a tremendous impact on your savings and investment performance.

Tax-deferred

Tax-deferred means that you do not pay taxes on earnings until it is received. Deferred annuities and life insurance cash values are a few examples.

Lets Look at an *Example:

Assume at age 40, you place $10,000 into a non-qualified annuity, earning six percent compounded annually. Since earnings grow tax-deferred, you accumulate $42,919 by age 65. You would then pay taxes as you withdrew your money. Ideally, this would occur at retirement when you could be in a lower tax bracket.

By comparison, if you placed $10,000 in a currently taxable vehicle (such as a CD) earning six percent, you would need to report each year’s earnings on your tax return. Assuming you’re in a 28 percent tax bracket, and you withdrew the amount to pay the tax from the accumulated value each year, your total value at age 65 would be $28,786.

Tax-exempt

Tax-exempt investments, such as tax-exempt municipal bonds, avoid federal income taxes on income from the investment (state income and alternative minimum taxes may still apply). However, the capital gains and losses on these investments may be subject to federal income taxes.

Roth IRAs are also tax exempt for those who qualify.

Tax-deductible

Tax-deductible means the investment can be deducted from your federal income tax.

An *Example:

If you meet deductibility guidelines, you can deduct all or part of an IRA contribution on your federal income tax return. Even IRA contributions that are not tax-deductible offer tax-deferred earnings.

Understanding these terms can help you reap the potential of your savings and investments.

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*Note : These are hypothetical illustrations and do not represent an actual investment scenarios. The above examples are for explanation of tax terms. More consideration should be involved in making an investment decision and should not be made based on the information given above.

Raj Satsangi, Financial Services Representative, Princor Registered Representative, Principal Financial Group. Send him your questions via email.

Photo by 401(K) 2012.

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