Tax laws in most countries enable people with earned income to save for retirement by investing some of their wages in tax-deferred retirement accounts. Employers often operate employee pension plans that are usually funded with a combination of employer and employee contributions. There are types of insurance contracts in which premiums grow tax-deferred that investors can utilize to save for retirement, while some people attempt to raise money for retirement years by investing in real estate and commodities.
In the United States, taxpayers can invest a portion of their taxable income in accounts called Individual Retirement Accounts. Similar plans exist in other countries, and contributions are normally tax deductible. Investors only have to pay taxes on funds when withdrawals are made and as long as this does not occur prior to the designated retirement age, account holders only pay ordinary income tax on earnings. If funds are withdrawn prior to the designated retirement age, penalties are assessed on both the principal and earnings.
Employer pension plans normally involve investing a portion of an employee's pre-tax earnings into a tax-deferred account containing mutual funds. In many places, employers can make matching contributions to these plans. Some companies allow employees to save for retirement by investing in company stock. To encourage employee participation, employers usually give additional shares to employees who fully participate in such plans. Employer sponsored retirement plans are usually inaccessible to people until they reach retirement age but in instances where premature withdrawals can be made, tax penalties are assessed on withdrawals of principal and interest.
Insurance contracts, such as annuities, are designed to provide people with a lifetime income stream. Many investors make annual contributions to annuities in order to save for retirement. Annuities begin with an accumulation phase, which lasts for several years during which the annuity owner can make periodic premium payments. At the end of the accumulation phase, the contract annuitizes and the annuity owner begins to receive monthly income payments. Investors often use annuity contracts as a way of creating supplemental retirement income.
Tax laws often limit the ability of people to invest funds designated as retirement money into real estate purchases or commodities. Despite the tax benefits available with designated retirement accounts, some investors choose to periodically buy real estate rather than invest in retirement accounts through their working years, and then sell the property when they retire. Investors who distrust investments such as mutual funds and stocks often invest in gold and silver because these commodities tend to hold value over time. The commodities are sold just prior to retirement age and are invested in liquid accounts from which the investors can draw income.
