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Part: 5 Here's Our Advice > Glossary - Pg. 296

Glossary 296 tax-deferred income Income that is earned but not received and, therefore, that is not taxed until some later event occurs. For example, interest earned on U.S. Treasury bills is received and taxed at maturity. Likewise, U.S. savings bonds provide appreciation of value on which holders may defer paying taxes until the security is cashed in. tax-exempt bonds Securities issued by states, cities, and other public authorities, the interest from which is either wholly or partly exempt from federal income tax and possibly from state or local income taxes. tax-exempt interest Interest earned on tax-exempt securities that is not included in the investor's gross income for regular federal income tax purposes. Depending on the original use of the money when the security was issued, the interest may be subject to alternative minimum tax. In most states, the income from municipal bonds issued within that state is tax-exempt to residents of the state. tax-free income Income received but not subject to income taxes. For example, interest from most municipal bonds is free of federal income taxes and often from state and local income taxes as well. tax-sheltered annuity (TSA) Also known as an IRS section 403(b) retirement plan. Permits an employee of a nonprofit (tax- exempt) institution to contribute up to $10,500 ($11,000 in 2002) of their wages into a tax- sheltered account. Qualifying employers include charities, religious organizations, healthcare organizations, or educational entities. Contributions serve to reduce taxable income in the year they are contributed. Taxes on income earned in the plan are deferred. Both contributions and income are taxable when withdrawals are made. Also called tax-deferred annuity. term certain method Method for determining the amounts of minimum required annual distributions from a 401(k)