Many Americans squirrel away as much as they can into retirement investment accounts like 401(k)s and I.R.A.’s that allow them to compound their earnings tax free. The accounts also reduce what they owe when tax day rolls around. For the average person, however, the government strictly limits the contributions to about $20,000 a year.
And then there are people who work at hedge funds.
A lot of the hedge fund managers earning the astronomical paychecks making headlines these days are able to postpone paying taxes on much of that income for 10 years or more.
The key to the hedge fund tax boon is that many managers of these lightly regulated private pools of capital have the ability to earn the bulk of their compensation offshore and invest it in their funds, where it grows tax-free.
“If you could compound your compensation tax-free, why wouldn’t you?†asked Stewart Massey, founding partner of Massey & Quick, a consulting firm.
