Tax Deferral
Postponing taxes on growth until money is withdrawn, allowing earnings to compound in the meantime.
Tax deferral means you don't pay taxes on an account's growth each year; instead, taxes are due when you take the money out. This lets earnings compound without an annual tax drag and can be valuable when you expect to be in a lower bracket later.
Traditional IRAs, 401(k)s, and deferred annuities all offer tax deferral. Withdrawals of deferred gains are generally taxed as ordinary income, and amounts taken before age 59½ may face an additional IRS penalty.
Example
Interest inside a deferred annuity isn't taxed each year; the owner pays tax only when they withdraw earnings.
This definition is for general educational purposes only and is not financial, tax, or legal advice. Tim Hartle is an independent insurance professional. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company and are not FDIC insured. Rules and product features vary by situation and by state. Please consult a qualified advisor about your own circumstances.
Related Terms
Deferred Annuity
An annuity that grows during an accumulation phase before income payments begin later.
Traditional IRA
A tax-deferred individual retirement account where withdrawals are generally taxed as income.
Qualified Money
Retirement funds held in tax-advantaged accounts like IRAs and 401(k)s, generally taxed when withdrawn.
Required Minimum Distribution
The minimum amount you must withdraw each year from most tax-deferred accounts once you reach the required age.
Go Deeper
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Annuities are insurance contracts. Guarantees, including guaranteed lifetime income benefits where available, are subject to the claims-paying ability of the issuing insurance company. Product features, fees, withdrawal restrictions, and surrender charges vary by contract.