What is a tax-deferred investment?

A tax-deferred investment is a type of financial product that allows an investor to place money in an account and defer paying taxes on the earnings until a later date. These investments are commonly found in retirement accounts, such as IRAs or 401(k)s. Tax-deferred investments offer several advantages over traditional investments, such as the ability to invest more money overall and to have more of the investment earnings grow tax-free. In Virginia, the state taxes income, but offers incentives for retirement savings. The Virginia Retirement System (VRS) offers tax-deferred investments through its 401(K) plans, while the Virginia College Savings Plan (VCSP) allows investors to place money into a tax-deferred account. Other financial institutions, such as banks and mutual funds, may also offer tax-deferred investment options. Tax-deferred investments are a good way to save for retirement since earnings on the investment grow tax-free until withdrawn. However, when the money is withdrawn, the investor must then pay taxes on the earnings. Additionally, the invested money is not accessible to the investor until retirement and there may be withdrawal penalties if it is tapped before retirement age. Overall, tax-deferred investments offer an important way for Virginia residents to plan for retirement, while also deferring taxes on the investment earnings until a later date. It is important to be aware of the potential withdrawal penalties, fees, and taxes associated with these investments before making any decisions.

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What is a tax-deferred investment?

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