A retirement savings plan available to employees of certain nonprofit organizations and public education systems allows for the deferral of income taxes on contributions and investment gains. This financial vehicle provides a way to accumulate funds for retirement while potentially reducing current taxable income. For example, a teacher might contribute a portion of each paycheck to this type of plan, lowering their current tax liability and allowing those contributions to grow tax-deferred until retirement.
The significance of such a plan lies in its tax advantages. The deferral of taxes on both contributions and earnings can lead to potentially greater accumulation of retirement savings over time, compared to accounts where investment gains are taxed annually. Historically, these plans were designed to offer retirement savings opportunities to those working in sectors that often lacked traditional pension plans, thereby filling a crucial gap in retirement planning options.
