Some investments give you the ability to enjoy tax-deferred growth. A traditional IRA, traditional 401k, 403b, and permanent life insurance all offer this ability. Plenty of other vehicles do as well. What exactly does it mean to have tax-deferred growth? It means that you “defer” (or put off) paying taxes on the gains and income in that account.

Let’s take an example. Suppose that you have $100 in an account. For easy math, let’s say you earn 10% on it during the year. That means you’ll have $110 in your account at the end of the year. If the 10% came as interest or dividends, do you have to pay taxes on it, and how much? The answer: it depends.

In a tax-deferred account, you will not pay taxes on your earnings this year. You can keep the extra $10 in there to continue to grow. Then, you get growth on top of your growth (otherwise known as compounding). Next year, you’ll have a whole $110 in the account that you can earn on.

However, assume that your account was not a tax deferred account. The IRS would say that you owe income taxes on $10 of income. Perhaps you have a hypothetical average tax rate of 25%. In that case, you’d owe $2.50 in taxes by next April! Where does the $2.50 come from? It’s up to you. You could pull it out of the account and leave $107.50 in there for future investment, or you could come up with the $2.50 from somewhere else.

Tax-deferred accounts help you compound money inside the account. There are always tradeoffs. For example, you might have to pay income tax when you take the money back out. Or, you might have to follow certain rules with the money – like leaving it in the account until you reach a certain age.

The mysteries of 401k savings are little understood by most people, yet they are an important part of personal finance in the USA.

A big question, often asked, is what happens to their 401k savings when they quit working. The reality is, not many people work in the same job for an entire lifetime. When you quit working, you have some options.

First, you can cash out. This is probably not your best option, but it’s your money. You can have the plan send you a check, and you can spend it as you please. Note that you’ll only get a check for 80% of your money in the plan — the other 20% goes directly to the IRS as a down payment on your taxes. They figure you’ll owe them at least that much. If it turns out you owe less, you may get it back as a refund.

Next, you could leave the money in the 401k plan. Your account balance often has to be above $5,000 to do this, but some smaller employers will let you hang around even if you have a smaller balance. Depending on how much you like the plan, this might be a good option. However, you’re leaving your retirement savings in somebody else’s hands — your former employer’s. They decide which investment company handles the money, and they have to sign off on any distributions from the plan. This can make it tough to get anybody to do anything if you ever want to do something with your money – you have to wait for several people to sign off.

Finally, you can roll your savings over to another similar account. If your new job has a 401k or 403b, these might work. Likewise, you could just roll the money into an IRA, where there will be no employer involved at all. By taking the money with you, you keep control over it. The only drawback to this option is that you actually have to take action and make some decisions on what to do with the money.

Of course, you’ll find that tax laws around these accounts change every day. Therefore, you ought to speak with a tax advisor and get some individualized input on what to do before you make any expensive mistakes.

On August 18th, President Bush signed into law The Pension Protection Act of 2006. This bi-partisan bill brings sweeping reform to America’s pension laws in an attempt to ensure millions of Americans a more secure retirement. With more Americans reaching retirement age and the millions of Baby Boomers approaching retirement age, this legislation is aimed at relieving the foreseeable strain on publicly funded programs such as Social Security.

The Pension Protection Act contains measures that will strengthen the federal pension insurance system in several ways. The new legislation:

* Requires additional premiums from companies that under-fund their pension plans;
* Extends the requirement that companies that terminate their pensions provide extra funding for the pension insurance system;
* Requires companies to measure the obligations of their pension plans more accurately;
* Closes loopholes that allow under-funded plans to skip pension payments;
* Raises caps on the amount that employers can put into their pension plans;
* Prevents companies with under-funded pension plans from promising extra benefits to their workers without paying for those promises up front.

The new Pension Protection Act also gives some new benefits to workers, and makes it easier for them to build their nest egg for retirement. Some points of the legislation regarding 401K plans and IRAs are these:

* Previously, companies were prevented from automatically enrolling employees in contribution plans, this legislation removes those barriers. Studies show more employees participate in 401K plans when they are enrolled automatically than will if they have to sign up;
* Gives workers more information about the performance of their accounts;
* Provides greater access to professional advice about investing for retirement;
* Gives workers greater control over how their accounts are invested;
* Makes permanent the higher contribution limits for IRAs and 401(k)s that were passed in 2001.

Is there a problem with Social Security in the USA? Here’s a little bit of advice :

By now you’ve probably already heard that Social Security is in a little bit of trouble. There’s probably no need to panic, but you should understand that the younger you are, the more different it will probably be. Who knows exactly what will happen?

Hopefully, you’ve also taken the time to figure out what you’ll do to pay for things in retirement. Because Social Security may not be there, here are a few alternatives:

1. Win the lottery
2. Inherit from your rich aunt who only loves you
3. Marry rich
4. Save a little money for yourself

Of all these options, marrying rich is probably the best choice. However, if you want to play the odds (and stay on your current spouse’s good side), you should probably start saving money.

Nobody is going to do it for you. All it takes is for you to make the decision to start saving and investing. This is not rocket science, so keep it simple. Here’s the secret formula:

1. Figure out how much you’ll need to save
2. Save that much
3. Invest it adequately — you don’t have to knock the cover off the ball
4. Enjoy the present — don’t stress to much about the future

Now, you have to do it yourself, but you don’t have to do it by yourself. What’s the difference? You have to actually decide to take action, and take the money out of your budget each month. However, you can get help on steps 1, 3, and 4 (you might even get help on step 2 from your employer!). The Web is full of financial calculators and financial advice — some of it is even good advice. You can also get help from financial advisors and folks who’ve been down the road before you.

You should be careful about who you listen to, because there is some bad advice out there. I heard a great way to help weed out bad economists (but I can’t remember who said it), and I think it’s relevant to financial advice as well. She said something along the lines of: The more famous a person is, and the more certain they seem to be, the more likely it is that they’re wrong. Avoid anybody who makes broad general statements on what you always or never need, and watch out for financial hype.