What Does Tax-Deferred Mean?
Tax-deferred means that taxes on money, or on its investment earnings, are postponed until a later date, usually when the money is withdrawn. Traditional IRAs and 401(k) plans are tax-deferred: contributions may reduce taxable income now, earnings are not taxed each year, and withdrawals are taxed as income.
Tax-Deferred vs. Tax-Free
With a Roth account, contributions are taxed first and qualified withdrawals are tax-free. Tax-deferred accounts reverse that order.
Effect on Growth
Because no tax is taken each year, the full balance can keep compounding until withdrawal.
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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.