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.
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Any type of contribution, compensation, or investment that is not taxed until the member receives the funds according to the programs guidelines.
- Browse Related Terms: 401(k) Savings Plan and 457 Savings Plan, Average Final Compensation (AFC), Defined Contribution Plan, Direct Rollover, IRC Section 401(a), Lump-Sum Distribution, Qualified Domestic Relations Order (QDRO), Qualified Plan, Rollover, Roth 401(k) Savings Plan, Single-Sum Distribution, Tax-Deferred