Tax-Advantaged Account

Governments offer tax-advantaged accounts to encourage people to save for retirement, education, healthcare or other purposes. The tax benefits can significantly increase how much savings grow over time.

Tax advantages typically come in one of three forms. Some accounts give tax relief on contributions, with tax paid later on withdrawals. Others take contributions from after-tax income but allow growth and withdrawals to be tax-free. Some offer both tax-deferred growth and other benefits.

Examples vary by country, including workplace pensions, individual retirement accounts, tax-free savings accounts and education savings plans.

For example, an investor whose contributions to a retirement account receive tax relief at 20% might effectively need to pay only 800 from their take-home pay for each 1,000 that goes into the account.

Tax-advantaged accounts usually come with rules. There may be annual contribution limits, restrictions on when money can be withdrawn without penalty, and limits based on income or eligibility. Breaking the rules can lead to tax charges.

Because rules differ widely between countries and change over time, investors should check the specific accounts available to them.