A number of tax-deferred investment vehicles are available to individuals saving for retirement, and that is a wonderful thing. With tax deferral, the return on your investment is not reduced by income taxes every year: you pay taxes only when you withdraw the money, most likely in retirement, when you may be in a lower tax bracket and will thus pay fewer taxes on the distributions. So what are your options?
The first kind of retirement plan you may think of for its tax-deferral benefits is your employer-sponsored retirement plan. These plans include defined benefit plans (more commonly referred to as pension plans), which provide a specific benefit in retirement, and defined contribution plans (such as 401(k) and 403(b) plans), which provide a specific contribution to an account in your name, but the benefit you will receive upon your retirement depends on the investment experience of your account.
But you have other options, including individual retirement accounts (IRAs). Traditional IRAs (to which anyone can contribute) and SEP and SIMPLE IRAs (designed for self-employed individuals and smaller employers) are like employer-sponsored retirement plans, but you purchase them yourself. Roth IRAs are a little different: you make after-tax contributions and investment income accrues tax free, but distributions are generally not taxed.
Finally, you could consider a fixed annuity, which is a financial product that provides a stream of income based on guaranteed rate of return for a certain period of time or even for your entire life. Because of this, annuities are similar to defined benefit plans or traditional pensions.
Note that there are different eligibility rules for each of these investment vehicles, such as income phase-outs, age requirements, and contribution limits. Please reach out to us if you need help determining which of these options is most suitable for you given your financial circumstances.