Final answer:
Investing in non-dividend paying stock expected to appreciate by 5% is tax planning by changing the time taxable income is recognized. Diversification and understanding of financial assets and strategies are key in tax planning. Workplace retirement accounts like 401(k)s also employ tax deferral strategies.
Step-by-step explanation:
Investing in non-dividend paying stock that is expected to appreciate yearly by 5 percent, instead of investing in 5 percent corporate bonds, is an example of tax planning by changing the timing of recognition of taxable income. When you invest in a non-dividend paying stock, you potentially defer taxes until the stock is sold, at which point the capital gains may be taxed. In contrast, corporate bonds typically pay interest annually, which would be taxed in the year it is received. This investment strategy hence potentially delays the tax liability. Private firms may provide investment options like stocks, bonds, and annuities through workplace retirement accounts such as 401(k)s, which offer special tax status, allowing for tax deferral until withdrawal. Diversification is another technique to manage investment risk, by spreading investments across different assets. Choosing investments that optimize tax incidence is a key aspect of financial planning. The approach involves understanding and utilizing different financial assets' and investment strategies' implications on tax planning, investment strategies, and ultimately, long-term wealth accumulation.