Tax Deferred: A tax-deferred account allows you to postpone income tax that would otherwise be due on employment or investment earnings you hold in the account until some point the future, often when you retire. For example, you can contribute pretax income to employer sponsored retirement plans, such as a 401(k) or 403(b). You owe no tax on any earnings in these plans, or in traditional individual retirement accounts (IRAs), fixed and variable annuities, and some insurance policies until you withdraw the money. Then tax is due on the amounts you take out, at the same rate you pay on your regular income. A big advantage of tax deferral is that earnings may compound more quickly, since no money is being taken out of the account to pay taxes. But in return for postponing taxes, you agree to limited access to your money before you reach 59 1/2.

 

Related Words

Tax Deferred: A tax-deferred account allows you to postpone income tax that would otherwise be due on employment or investment earnings you hold in the account until some point the future, often when you . . . View Full Definition

Tax Deduction: A direct dollar-for-dollar reduction in tax allowed for expenses such as child care and R&D for building low-income housing. Compare tax deduction.

After-Tax Contribution: An after-tax contribution, or excess deferral, is money you put into your 401(k) or other employer sponsored retirement savings plan in addition to your pretax contribution. You might make a . . . View Full Definition

Deferred Capital Gain: The part of the realized gain that is tax deferred.