Tax-Preferred Account Contributions refer to the payments made into accounts that offer specific tax advantages to the contributor. These accounts are designed to encourage savings for retirement or education by allowing contributions to grow tax-deferred or tax-free.
For example, contributions to a traditional Individual Retirement Account (IRA) may be tax-deductible, meaning they reduce the contributor’s taxable income in the year the contribution is made. Conversely, contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Tax-preferred accounts can also include Health Savings Accounts (HSAs) and 529 college savings plans, each with distinct tax benefits that incentivize saving for specific purposes.
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