Deferring taxes on your income is an investment strategy in which income taxes are paid at a later date for money invested now. The benefit of tax deferral is that it provides more money for you to invest now.

For example, say you manage deducting $1000 from your taxable income in the current year and then you invest that amount into an account that gives you interest. As a result of this, you get to pay around $200 less in income tax for the current year. Therefore you are gaining $200 more as compared to if you hadn’t invested the $1000. So if you add the deferred $200 to the already invested $1000, your investment adds up to $1200. The other kind of tax deferral that investors often opt for is deferring the amount of tax to be paid for interest earned. The invested amount is taxed, but the interest earned becomes free of tax.

Another type of tax deferral used by investors is the deferment of taxes paid on interest earned. The dollars invested have already been taxed, but any interest earned is tax free.

Investment Vehicles Tax deferred accounts shelter your money from taxes until you begin making withdrawals in the later part of your life, when you’re likely to be in a lower tax bracket. The type of investment vehicles best for you depends on your situation.

One available plan is the 401 (k). This vehicle is available only through employers who offer the plan. It allows you to make tax-deductible contributions that grow tax deferred until you withdraw them. Depending on your particular plan, your 401(k) plan may come with a bonus. Some employers match your contributions. You could make 25%-100% on your money instantly if your employer offers matching funds.

By using the 401(k) planning, you could add more to your retirement plan, than most other plans. You can add around $9,500 to your retirement plan, and your employer can add another $30,000 every year. You can also add the yearly bonuses that you receive to this plan to help your retirement money grow even faster. If you leave your job or wish for more freedom with your money, you can always roll your assets over into an IRA account.

The 401(k) is the best suited plan for somebody who is new at investing or does not know what kind of stocks to invest in.

The other type of plan that has to be offered by your employer is the 403(b). This is only for employees working in public schools or other non profit organizations. For them, money invested in this plan is tax deductible and tax deferred. Here too, you can contribute up to $9,500 on a yearly basis.

The other plan is the 403(b) which again has to be offered by your employer. This plan is meant for employees who work in public educational centers or other non profit organizations. Similarly in this plan the money is tax deductible and the investment is tax deferred and you can contribute up to $9,500 yearly. With this plan however you need to be aware of certain risks. You have to invest the money in a tax sheltered annuity which will result in high sale charges and the rates they give will not always be guaranteed.

Any person who has an earned income or the spouse of somebody who has an earned income can open their own IRA and add up to $2000 to it yearly. The earnings are not subjected to tax unless you start withdrawing from the account, but you will be charged penalty if you start withdrawing before the age of 59 and a half. However, even if your money is not tax deductible, they will be tax deferred.

The type of investments you can make with your IRA dollars depends on the custodian, but you generally have many more investment options with an IRA than you do with any of the employer sponsored investment plans.

The Keough Plan is another such plan that is available for people who are self employed or who work for businesses that are unincorporated. Under this plan, you get to contribute up to 25% of your income every year with a maximum of up to $30,000. You can contribute most with this plan than any other IRA plan, and all your earnings become tax deductible and tax deferred. There are options to choose from in this plan, that is, you could choose to pay according to a fixed percentage every year or a variable percentage or a fixed amount. A lawyer should be best able to guide you in what suits you the best.

A SEP, or a Simplified Employee Plan is easier to set up than a Keough allows you to deduct 15% of your self-employment income, to a maximum of $30,000. As an employee, you can contribute up to $7000 per year to your SEP, and your employer can contribute the rest. SEP plans are only available to companies with 25 or fewer employees, and at least half of those employees must participate in the plan.

All the above described investment vehicles fall under one of these two categories: Qualified or Non – Qualified plans.

The 401 (k) and 403 (b) plans are qualified plans. Qualified plans are employer-sponsored plans that provide good benefits but that are restricted to the types of investment options offered by the employer. As we already mentioned, 403 (b) plans often require you to invest your money in tax sheltered annuities. 401 (k) plans generally offer a broader range of conventional investment options, but still seem very limited when compared to non-qualified plans. You usually get to select from a preset choice of investment options such as fixed interest annuities, money market funds, stock in your company, and other traditional investments.

The second category of retirement plans is nonqualified plans. Nonqualified plans generally allow more freedom as to when, or if, a contribution has to be made, and they also offer more latitude in the type of investments that can be made. All IRAs fall into this category. Generally, investors have more control over their investments in a nonqualified plan than with a qualified one. Usually they are easier to work with, have less regulation, and require less reporting. Often, contributions to these plans can be deducted as a business expense.

Most investments made with the vehicles we have been discussing fall into one of two asset categories: The first is debt and the second is equity. As an investor, you are either an owner or a creditor. Equity owners are entitled to all free cash flows that exceed the debt payment obligations of the underlying economic entity. Creditors receive priority in agreed-upon future interest and principal payments.

When choosing a retirement plan, you want to be certain of the types of investments permitted with your plan. Do not open an account that does not give you the freedom to choose your own investment options, whether they are debt or equity investments.