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An account or investment where you don't pay taxes on gains until you withdraw the money, usually in retirement.
Why It Matters
Tax deferral supercharges compounding. In a taxable account, you pay taxes on dividends and gains every year — money that can't grow. In a tax-deferred account (traditional 401(k), traditional IRA), all gains compound tax-free until withdrawal. This can result in 20-30% more wealth over 30 years compared to the same investments in a taxable account.
Key Points
- Traditional 401(k) and traditional IRA are tax-deferred — pay taxes when you withdraw in retirement
- Roth accounts are different: you pay taxes now, but withdrawals are completely tax-free
- Required Minimum Distributions (RMDs) force you to start withdrawing (and paying taxes) at age 73
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Tax-Advantaged Accounts
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Related Terms
Common Questions
An account or investment where you don't pay taxes on gains until you withdraw the money, usually in retirement. Tax deferral supercharges compounding. In a taxable account, you pay taxes on dividends and gains every year — money that can't grow.
Tax deferral supercharges compounding. In a taxable account, you pay taxes on dividends and gains every year — money that can't grow. In a tax-deferred account (traditional 401(k), traditional IRA), all gains compound tax-free until withdrawal. This can result in 20-30% more wealth over 30 years compared to the same investments in a taxable account.
Traditional 401(k) and traditional IRA are tax-deferred — pay taxes when you withdraw in retirement
Roth accounts are different: you pay taxes now, but withdrawals are completely tax-free
Required Minimum Distributions (RMDs) force you to start withdrawing (and paying taxes) at age 73