What is a tax-deferred investment?

A tax-deferred investment is an investment choice in which an investor delays paying taxes on the earnings that the investment generates. In Washington, tax-deferred investments are generally regulated by the Internal Revenue Service (IRS). Tax-deferred investments, such as retirement accounts like 401(k), 403(b), and IRA plans, allow investors to put away money that can benefit them later in life. The earnings, such as dividends, capital gains, and interest, are reinvested until the investor withdraws the money. Because taxes are deferred, investors can take advantage of the compounded earnings of the investment. For example, if an investor contributes $5,000 to a retirement account every year over 10 years and the investment averages 10% returns annually, the initial $50,000 invested plus the earnings would be valued at $176,615. However, investors should keep in mind that taxes must eventually be paid on their tax-deferred investment when the money is withdrawn in the future. For retirement accounts, taxes are usually paid at the investor’s current tax rate when the money is taken out of the account. Overall, tax-deferred investments provide investors with the opportunity to invest money, earn returns on that money, and pay taxes whenever they choose. These types of investments can be beneficial for those looking to save for retirement or other long-term goals.

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What is a tax-deferred investment?

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