Tax deferred

Tax-Deferred Income

Any income that one earns but does not receive until a later date, resulting in a situation in which taxes on the income are not paid until later. Common examples of tax-deferred income fall into two broad categories. The first is income in certain retirement accounts; the account holder is not liable for taxes until funds are disbursed. The second is the capital gain on some bonds such as U.S. Treasury securities; taxes on these gains are deferred until maturity. It is important to note that tax-deferred income is not the same as tax-free income, which has no tax liability at all.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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 retirement plans, such as a traditional 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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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