How To Protect Your Income From The I.R.S.

Taxes can chomp away a third or more of your income. Here are some investments that can help eases your tax bite.

the money is locked in for a fixed period of time, often seven years, this isn’t the best tool for younger investors who need more flexibility, he explains.

Annuities, provided by insurance companies, are marketed and sold through brokerage firms, banks and other financial institutions. Minimum investment requirements are generally $1,000-$5,000 or a small monthly contribution of $100. Variable annuities invest in a mix of mutual funds, giving you a more balanced retirement fund.

Unlike fixed annuities, which guarantee a fixed rate of return, variable annuities are subject to market fluctuations. Expenses are higher than regular mutual funds because of the extra 1%-1.25% insurance charge. There’s also a surrender charge–a fee for when you bail out–that may run as much as 8%. To make he most of this vehicle, look at the cost of insurance vs. the growth of the investments in he product. IRAs, 401(k)s and annuities are meant o be sources of income for retirement. So, if you withdraw any of these funds before age 59 1/2, you can expect a tax penalty of 10%.

Notwithstanding, the best way to keep what you earn and make your money work for you is to invest it in tax-free or tax-deferred vehicles. If invested properly, today’s dollar could be worth thousands tomorrow.

TERMS TO KNOW
Balanced fund. A mutual fund with a portfolio mix of stocks and bonds. It offers safety of principal, regular income and modest growth.
Capital appreciation. A rise in the value of a security (a bond or stock).

Fixed-income fund. A security that pays a fixed rate of return. It usually refers to corporate, municipal and government bonds, which pay a fixed rate of interest until the bonds mature, and to preferred stock, which pays a fixed dividend.

Growth fund. A mutual fund that seeks long-term capital growth. These funds invest principally in common stocks.

Keogh. A retirement plan for self-employed individuals (sole proprietors or partners in a business).

SEP (Simplified Employee Pen-sion). A simple retirement plan, sometimes called a SEP-IRA, for self-employed individuals nd small business owners.

Treasuries. Bonds, notes and bills issued by the U.S. government and backed by its full faith and credit.

Yield. The rate of return on a security based on market price.

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