how a qualifying investment works
qualifying investments provide an incentive for individuals to contribute to certain types of savings accounts by deferring taxes until the investor withdraws the funds contributions to qualified accounts reduce an individual s taxable income in a given year making the investment more attractive than a similar investment in a non qualified account example of a qualifying investmentfor high income individuals deferring taxation on earnings until the distribution from a retirement fund could potentially yield savings in a couple of ways for example consider a married couple whose gross income would push them just over the break point to a higher tax bracket in 2024 a married couple filing jointly would see a rise in tax rate from 24 to 32 on earnings over 383 900 because the internal revenue service irs uses marginal tax rates the couple s 2023 earnings between 201 050 and 383 900 would be taxed at 24 1suppose each spouse s employer offered a 401 k plan and the couple maxed out their contributions for the year the contribution limit established by the irs caps annual contributions to 401 k plans in 2024 at 23 000 each so the couple could trim 46 000 in total off their 2024 taxable income bringing the total number down from 383 900 to 337 900 comfortably within the 24 tax bracket if the couple had needed to make an additional contribution and they were over the age of 50 they are each allowed by the irs to make a catch up contribution of 8 000 in 2024 2after retirement the taxes the couple will pay on distributions will correspond to their post retirement income which likely will be quite a bit less than their combined salaries to the extent their retirement distributions stay below the threshold for higher income tax brackets they will profit off the difference between the marginal rates they would have paid in the present and any lower marginal rates they pay in the future qualifying investments vs roth irasinvestments qualifying for tax deferred status typically include annuities stocks bonds iras registered retirement savings plans rrsps and certain types of trusts traditional iras and variants geared toward self employed people such as sep and simple ira plans all fall under the category of qualifying investments roth iras on the other hand operate a bit differently when people contribute to roth iras they use post tax income meaning they don t get a tax deduction in the year of the contribution where qualifying investments offer tax advantages by deferring payment of taxes roth iras offer a tax advantage by allowing contributors to pay a tax on their investment funds upfront in exchange for qualified distributions under a roth ira distributions that meet certain criteria avoid any further taxation eliminating any taxation of the appreciation of contributed funds 3it s important to note that roth iras have lower contribution limits than defined contribution plans such as 401 k s roth and traditional iras both have annual contribution limits of 7 000 for 2024 for individuals aged 50 and over they can deposit a catch up contribution of 1 000 in 2024 2