What is 'tax-deferred'?

Tax-deferred status refers to the investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor takes constructive receipt of the gains. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities.

Breaking down 'tax-deferred'

By deferring taxes on the returns of an investment, an investor benefits in two ways. The first is tax-free growth. Rather than paying tax on the current returns of an investment, tax is paid only at a later date, leaving the investment to grow unhindered. The second benefit of tax deferral extends to investments made during pre-retirement periods when earnings and taxes levied against working wages are typically higher than earnings in post-retirement phases.

Qualified tax-deferred vehicles

A 401(k) plan is a common vehicle offered by employers to grow employees’ retirement savings. Gains attributed to securities held within a 401(k) do not apply to an employee’s taxable income. Contributions to qualified savings plans such as 401(k) accounts are made on a pre-tax basis, reducing taxable income received by the employee.

Withdrawals made from qualified retirement plans are taxed at the investor’s individual tax rate at the time of receipt. Withdrawals for 401(k) plans are generally taken after age 59½ in a 401(k). Most other retirement plans allow withdrawals at age 55. Tax-deferral and employer dollar-matching provisions encourage employees to set aside wages to grow a retirement nest egg and delay receipt of funds to a period when tax rates are expected to be lower.

Non-qualified tax-deferred vehicles

A non-qualified tax-deferred investment does not reduce taxable income, but it does allow capital gains and interest to grow unencumbered. Annuities are a popular insurance product embracing the benefits of tax deferral. While qualified retirement plans such as traditional IRAs limit contribution amounts of $5,500 annually, many annuities do not restrict contribution amounts.

For more information about tax-deferred plans contact one of our CFS Financial Advisors at Denali to learn how a this plan can fit into your investment strategy.

© 2017, Investopedia, LLC.  All Rights Reserved

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.

For specific tax advice, please consult a tax professional.

Financial Advisors are registered to conduct securities business and licensed to conduct insurance business in limited states. Response to, or contact with, residents of other states will be made only upon compliance with applicable licensing and registration requirements. The information in this website is for U.S. residents only and does not constitute an offer to sell, or a solicitation of an offer to purchase brokerage services to persons outside of the United States.

Qualified retirement plans

Several different qualified retirement plans are provided by employers. Speak to one of our CFS Financial Advisors today to maximize your benefit.

Learn More

Wealth management

You’ve planned, saved and are putting away for your retirement. Let our CFS Financial Advisors help you with your wealth management strategy.

Learn More

Comprehensive retirement planning

Your future is now. Start planning for retirement at any stage of your life. Find out how our CFS Financial Advisors can help you start planning today.

Learn More

Estate planning and inheritances

Do you have an estate you need to manage now and into the future? Let our CFS Financial Advisors help you develop a road map for your peace of mind.

Learn More

Have a question? Don't wait on hold.

Paddling on a lake in the morning mist

Retirement planning: the basics

You may have a very idealistic vision of retirement–doing all of the things that you never seem to have time …

Generations of a family splashing their feet in a lake

Asset protection in estate planning

You’re beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is …