How Can I Generate Tax-Deferred Income? 

Tax deferral is an extremely attractive component of any tax planning strategy.The income you earn on your principal is allowed to compound tax-free until you withdraw the money. Only at the time of withdrawal do you become liable for taxes.

Tax deferral is encouraged by the government to stimulate long-term planning, especially retirement planning. Individual Retirement Accounts, Keogh plans, 401(k)s and other qualified retirement plans all benefit from tax deferral.

In addition, many insurance-related investments, such as annuities (both fixed and variable) and certain life insurance contracts, include the benefit of tax deferral. An important point is that if you are buying a product to fund a retirement plan that already provides tax deferral under sections of the Internal Revenue Code, you should do so for the products' features and benefits other than tax deferral. The tax deferral of the contract does not provide necessary or additional benefit.

There is a substantial benefit to deferring taxes as long as possible. The compounding effect can be dramatic over an extended period of time and can make a substantial difference to a retirement nest egg.

In fact, the difference can be made even more dramatic when making a choice whether to invest into tax-deferred vehicles at the beginning or the end of the year. Using a hypothetical 8% annually compounded return, if you invest the maximum annual contribution (under the 2008 tax law) in your IRA at the start of each year, after 30 years you will have accumulated $611,729.* On the other hand, if you had invested each year at the end of the year, you would have accumulated only $566,416, a difference of $45,313.*

One note of caution: When formulating your tax plan, recognize that most tax-deferred investments do incur penalties for withdrawals prior to age 59½. The government not only taxes you at that point (withdrawals are subject to income tax treatment), but also imposes a 10 percent penalty. In addition, company imposed withdrawal charges may apply.  Once again, the government is encouraging long-term planning.

Another nice feature of the tax-deferred investment is the flexibility to choose from the complete spectrum of investment vehicles. Under the tax-deferred umbrella, you can select an equity portfolio, a fixed income portfolio, or a combination.

Tax-deferred income investments, which reduce your current tax liability and can increase your net worth, may be an attractive addition to your portfolio.

*This example is hypothetical and intended for illustrative purposes only and is not indicative of the actual performance of any particular product.  These figures are not intended to represent the performance of any specific investment, insurance contract, or other financial product.  This example does not take into account the impact of any fees or taxes.

GE 46282 (10/08)