Tax Deferred

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Definition of 'Tax Deferred'

Tax deferred is a term used to describe investments or other financial transactions that allow the investor to postpone paying taxes on the earnings until a later date. This can be beneficial for investors who are in a lower tax bracket now and expect to be in a higher tax bracket in the future. Tax deferred investments can also be helpful for investors who are nearing retirement and want to minimize their tax liability.

There are a number of different ways to defer taxes on investments. One common way is to invest in a 401(k) plan or other employer-sponsored retirement plan. These plans allow employees to contribute pre-tax money to their retirement savings, which means that they do not have to pay taxes on the money until they withdraw it in retirement. Another way to defer taxes on investments is to invest in a traditional IRA. Traditional IRAs allow individuals to contribute pre-tax money to their retirement savings, and the earnings on these contributions grow tax-deferred until they are withdrawn.

There are also a number of other ways to defer taxes on investments, such as investing in municipal bonds, which are issued by state and local governments and are exempt from federal income tax.

It is important to note that tax deferred investments do not come without some risks. For example, if an investor withdraws money from a tax deferred account before they reach retirement age, they may have to pay income taxes on the earnings, as well as a 10% early withdrawal penalty. Additionally, tax deferred investments may not be as liquid as other types of investments, such as stocks or mutual funds. This means that investors may not be able to access their money as quickly if they need it.

Before investing in any tax deferred investment, it is important to carefully consider the risks and rewards involved. Investors should also consult with a financial advisor to make sure that they are making the right decision for their individual circumstances.

Here are some additional examples of tax deferred investments:

* Deferred compensation plans
* Annuities
* Life insurance policies
* Qualified retirement plans
* Coverdell Education Savings Accounts (ESAs)
* Health Savings Accounts (HSAs)

Tax deferred investments can be a valuable tool for investors who are looking to save for retirement or other long-term goals. However, it is important to understand the risks and rewards involved before making any investment decisions.

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