Tax-Deferred Account

Tax-Deferred Account

A Tax-Deferred Account is a financial account that allows individuals to postpone paying taxes on income and investment gains until a later date, usually when funds are withdrawn.

Contributions to these accounts are often made with pre-tax dollars, meaning they reduce taxable income in the year they are contributed. Common examples of tax-deferred accounts include traditional individual retirement accounts (IRAs), 401(k) plans, and certain annuities.

For instance, if an individual contributes $5,000 to a traditional IRA, that amount is deducted from their taxable income for that year. Taxes are owed only when withdrawals are made, typically during retirement when the individual may be in a lower tax bracket.