Retirement Accounts - Introduction
Retirement accounts can be individual or employer-sponsored. In either case, they are designed to allow investments in your client's pension to grow until retirement.
- Usually, the money invested in a retirement account is deductible from income for tax purposes: if your client earns $100,000 per year and puts $3,000 in a pension plan, then she is taxed as if her income were $97,000.
- Furthermore, all capital gains that accrue and all dividends that are reinvested are tax-deferred. That does not mean they are tax-free, but it does mean she does not have to pay taxes until she withdraws money from the account. However, she is likely to be in a lower tax bracket as a retiree than she is now that she is still a wage earner.