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Published on 7/17/2015 additional information available

Tax deferred vs Tax free

#life insurance
# annuity
# tax deferred
# tax free
# investment

What does it mean to receive a tax deferred benefit?
Investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor withdraws and takes possession of them. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities.

For example with a IRA - Individual retirement accounts (IRAs), encompass a range of retirement savings plans that provide tax benefits to participants. Unlike financial products that mature, such as a bond or a certificate of deposit (CD), IRAs do not technically mature. Instead, account holders must start receiving distributions by April 1 of the subsequent year after the year in which they reach age 701/2, according to the Internal Revenue Service.

Be mindful to this point, IRA accounts themselves do not "mature," however, investments within your IRA may have maturity dates. Generally, this would be CD's or bonds. Both of these investments earn a specified amount of interest until the maturity date. At that point the owner is entitled to the entire principal plus any accumulated interest.

Early Withdrawal Penalty
If you have not yet turned age 59 1/2 when your IRA CD or bond reaches maturity, and you want to withdraw the maturity value, you will be charged a 10 percent penalty. If your account is a Roth IRA it must have also been open for at least five years. There are a few exceptions that allow you to make early withdrawal from your IRA without paying the penalty. You may use the money to pay for college or other post-secondary school for either yourself or your child. You may also use the money to pay for your first home or to pay medical expenses that are more than 7.5 percent of your adjusted gross income.

Income Tax Owed, is added to the early withdrawal penalty. So, you will be paying for that withdrawal (Withdrawal amount minus 10 percent penalty minus income owed on withdrawal amount = a lot less than you thought you would be receiving in hand).
If the money comes from a traditional IRA, and you claimed a deduction for it when you contributed to the IRA, you will need to pay income tax on the withdrawn amount. Income tax is determined based on your current tax bracket. Withdrawing a significant sum of money from your IRA can push you into a higher bracket. If the money comes from a Roth IRA, you've already paid income tax on you contributions so you will only owe tax on the interest you earned on your CD or bond.

There is no penalty if you take the money from a mature IRA CD or bond once you have reached retirement age 59 1/2. In the case of a CD you will have to time your withdrawal carefully. Banks often automatically renew CD's after a certain grace period if you have not instructed them to do otherwise. In this case, withdrawing the rolled over CD may require you to pay a penalty.

Now, what does it mean to receive a tax free benefit? Is there anything really that's considered Tax Free?
Get Tax-Free Retirement Income With Life Insurance. Life insurance can be used both in the accumulation phase and the distribution phase. With younger individuals who are still accumulating assets, either variable or index annuity is a way to go.

Use the policy as an accumulation vehicle, putting in additional dollars over and above the premiums required to support life insurance, and those additional dollars go into sub-accounts or into the index accounts, depending on the type of policy. Those dollars grow tax-deferred, just like an annuity.

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