Tax Deferred

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DEFINITION of 'Tax Deferred'

Investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor withdraws and takes possession of them. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities.

INVESTOPEDIA EXPLAINS'Tax Deferred'

By deferring taxes on the returns of an investment, the investor benefits in two ways. The first benefit is tax-free growth: instead of paying tax on the returns of an investment, tax is paid only at a later date, leaving the investment to grow unhindered. The second benefit of tax deferral is that investments are usually made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

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RELATED FAQS
  1. How is compound interest taxed?

    Compound interest is money that is earned and added to a principal balance and then earns additional interest. Adding interest ... Read Full Answer >>
  2. How do deferred tax assets help in meeting retirement goals?

    Investors who are saving for retirement need to consider a number of important factors, such as investment allocation, risk ... Read Full Answer >>
  3. What are the main reasons to obtain a Registered Retirement Savings Plan (RRSP)?

    A Registered Retirement Savings Plan, or RRSP, can be an excellent tax-deferred savings vehicle for Canadians who are looking ... Read Full Answer >>
  4. Are annuities qualified or nonqualified retirement instruments?

    An annuity is a retirement product with a contract between an investor and a financial institution, generally an insurance ... Read Full Answer >>
  5. What's the difference between a savings account and a Roth IRA?

    A savings account is an all-inclusive term , which includes IRAs and regular ( non-retirement) savings. A Roth IRA is a savings ... Read Full Answer >>
  6. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>

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