DEFINITION of Asset Accumulation
Asset accumulation is the increase in financial assets held through earnings, savings and investment returns. Asset accumulation can be measured as the monetary value of investments, the amount of income that is reinvested or as the change in the value of assets owned.
BREAKING DOWN Asset Accumulation
Asset accumulation typical refers to the accumulation of non-physical financial instruments represented on paper, yielding profit, interest, rent, royalties, fees or capital gains. These assets derive value through a contractual claim, rather than tangible quality. Examples of non-physical financial instruments include stocks, bank deposits and bonds.
Asset accumulation can also, less commonly, refer to the accumulation of tangible means of production, such as factories or research and development, as well as non-productive physical assets, such as real estate.
Asset Accumulation and Retirement
Retirement plans are the most common method of asset accumulation for individual investors. In the United States, retirement plans are typically classified as either defined-benefit or defined-contribution plans. In a defined-benefit plan, asset-accumulation decisions are largely handled by pension fund administrators, including collecting money, making investments and reinvesting investment returns. Separate accounts for each participant do not exist.
In a defined-contribution plan, each participant has an account, and asset-accumulation decisions, including how much to save and how to invest or reinvest, are handled by each participant.
Some types of retirement plans, such as cash-balance plans, combine features of both defined-benefit and defined-contribution schemes.
Tax Breaks to Encourage Asset Accumulation
Retirement plans are often given tax breaks by the government to encourage asset accumulation. Most commonly, the money contributed to the account is not taxed as income at the time of the contribution. In the case of employer-provided plans, the employer can receive a tax deduction for the amount contributed as if it were regular employee compensation. This is known as a pre-tax contribution, and the amount allowed varies significantly among plan types.
The other significant advantage is that the assets in the plan grow through investing without being taxed on the annual growth. Once the money is withdrawn, it is taxed fully as income for the year of the withdrawal.
Roth IRA and Roth 401(k) plans offer tax advantages that are essentially reversed from most retirement plans. Contributions to Roth IRAs and Roth 401(k)s must be made with money that has been taxed as income. Withdrawals from the account are received by the taxpayer tax-free.