What is a tax-deferred investment?

A tax-deferred investment is an investment that allows the taxpayer to delay paying taxes on any profits from the investment until a later date. This type of investment gives the taxpayer time to let the investment grow without immediate tax obligations, allowing the taxpayer to realize greater long-term gains. In Maryland, tax-deferred investments are typically offered through retirement accounts such as a 401(k), 403(b) or Roth IRA. When an investor contributes money to these retirement accounts, the money goes in untaxed, but when the investor takes the money out, taxes are then due. Other types of tax-deferred investments that are available in Maryland are municipal bonds. These bonds allow investors to buy debt that is free from state and federal taxes. Investors in a municipal bond are also exempt from paying taxes on any interest or earnings those bonds generate. Tax-deferred investments can provide great rewards, but they also come with certain risks. Investors should be aware of the IRS rules and regulations for each type of investment they are looking at before making a decision. Investing for a retirement account is a long-term commitment and should be approached with caution. Knowing the risks and rewards of each investment type can help taxpayers make an informed decision that best fits their own financial goals.

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What is a tax-deferred investment?

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