Tax-Deferred Retirement Accounts refer to investment accounts that allow individuals to postpone paying taxes on the income and gains generated within the account until withdrawals are made, typically during retirement.
These accounts, such as Traditional IRAs and 401(k) plans, enable individuals to contribute pre-tax income, reducing their taxable income in the year of contribution. Taxes are then paid at the individual’s ordinary income tax rate upon withdrawal, usually when they are in a lower tax bracket in retirement.
For example, if a person contributes $5,000 to a Traditional IRA, they do not pay taxes on that amount until they withdraw it in retirement, potentially allowing for greater growth of the investment over time due to the tax deferral.
« Back to Glossary Index