Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savings accounts, medical savings accounts, and government bonds. Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest. Benefits Tax advantages provide an incentive to engage in certain investments and accounts, functioning like a government subsidy. For example, individual retirement accounts are tax-advantaged since they are tax-deferred. By encouraging investment in these accounts, there is a reduced need for the government to support citizens later in life by spending money on welfare or other government expenses. Capital gains tax rate benefits may also spur investment. Types of tax-advantaged accounts and investments Retirement plans An example is retirement plans, which often offer tax advantages to incentivize saving for retirement. In countries in which the average age of the population is increasing, tax advantages may put pressure on pension schemes. For example, where benefits are funded on a pay-as-you-go basis, the benefits paid to those receiving a pension come directly from the contributions of those of working age. If the proportion of pensioners to working-age people rises, the contributions needed from working people will also rise proportionately. In the United States, the rapid onset of Baby Boomer retirement is currently causing such a problem. However, there are international limitations regarding tax advantages realized through pensions plans. If a person with dual citizen in the United States and in the United Kingdom, they may have tax liabilities to both. If this person is living in the United Kingdom, their pension could have tax advantages in the UK, for example, but not in the US. Even though a UK pension may be exempt from UK tax, it doesn’t necessarily mean that it is exempt from US taxes. In short, a US Tax payer with dual citizenship may have to pay taxes on the gains from the UK pension to the United States government, but not the United Kingdom. In order to reduce the burden on such schemes, many governments give privately funded retirement plans a tax advantaged status in order to encourage more people to contribute to such arrangements. Governments often exclude such contributions from an employee's taxable income, while allowing employers to receive tax deductions for contributions to plan funds.