FIN 502 Chapter 8: Chapter 8.docx
Document Summary
The general principle is that if you cant use the income for consumption purposes, you shouldn"t have to pay tax on it until you can use it. If you can invest the tax-deferred income at a rate of return which is untaxed, then you get a second advantage with faster compounding. Established by an employer to defer income payable to employees to provide retirement income for them. May have payments made into it by either or both the employer and the employee, depending on the terms of the plan. Contributions are deposited with a plan trustee who invests them. When employee retires, he receives a pension from the plan. The contributions to the plan are not taxed as income in the employee"s hands at the time they are put into the plan. The employee pays tax on the pension as it is received. Employee"s pension contributions are deductible from taxable income, and accumulate at the before-tax rate of return.
