Investing in tax-favored retirement accounts allows you to diversify your tax responsibilities the same way you diversify your investment holdings.
Some retirement accounts allow you to postpone paying taxes on your earnings. These accounts, such as traditional individual retirement accounts (IRAs) and Simplified Employee Pension Plans (SEP IRAs), allow you to make pre-tax contributions. Your money grows tax-free until you finally withdraw it, at which time it is taxed as regular income.
Because these plans are intended to encourage investing for retirement, there are generally penalties, in addition to whatever taxes you might owe, for withdrawing money before age 59 1/2. There is also typically a cap, or limit, to the amount you may invest in an IRA or SEP IRA each year.
Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Contribution and income limits are subject to change without notice. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.