Deferred Account

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DEFINITION of 'Deferred Account'

An account that postpones tax liabilities until a future date. A deferred account refers to one where there is a deferral of tax, usually in accounts specifically designed for retirement, such as an Individual Retirement Account (IRA) in the U.S. Deferred accounts have proved to be enormously popular since their introduction, especially as fewer companies offer pensions and the burden of saving for retirement has shifted to individuals.

BREAKING DOWN 'Deferred Account'

The rationale behind deferred accounts is that they facilitate saving for retirement by enabling investments to grow tax-free until withdrawal. This tax-free compounding effect may generally enable investments in deferred accounts to grow faster than in taxable accounts. Another benefit of deferred accounts is that investments are only taxed upon withdrawal, which is usually assumed to be at retirement, when the contributor is presumably in a lower tax bracket.

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