what does tax deferred mean 
tax deferred status refers to investment earnings that accumulate tax free until the investor takes constructive receipt of the profits some common examples of tax deferred investments include individual retirement accounts iras and deferred annuities interest dividends and capital gains are earnings that can be considered tax deferred earnings understanding tax deferralan investor benefits from the tax free growth of earnings with tax deferred investments the tax savings can be substantial for investments held until retirement when the retiree will likely be in a lower tax bracket and no longer be subject to premature tax and product withdrawal penalties investing in qualified products such as iras allows participants to claim some or all of their contributions as a deduction on their tax returns 1 the benefit of declaring deductions in current years and incurring lower taxation in later years makes tax deferred investments attractive qualified tax deferred vehiclesa 401 k plan is a tax qualified defined contribution account offered by employers to help grow their employees retirement savings companies employ a third party administrator tpa to manage contributions which are deducted from employee earnings 2employees choose to invest these contributions among various options such as equity funds company stock money market equivalents or fixed rate options contributions to qualified savings plans such as 401 k accounts are made on a pre tax basis this reduces taxable income received by the employee in the year the contributions are made which typically equates to lower tax liability 3distributions from qualified plans are taxable as ordinary income if the owner is under the age of 59 when they take the money the irs may assess a 10 premature withdrawal penalty in this case 4 tax deferral and employer dollar matching provisions encourage employees to set aside wages for retirement savings nonqualified tax deferred vehiclescontributions to a nonqualified plan are made from post tax income so they don t reduce taxable income in the year they re made 1 however the earnings may accumulate tax free if the plan is tax deferred the contributions establish a cost basis for interest calculations many annuities and other nonqualified tax deferred products don t restrict contribution amounts but individual retirement accounts such as traditional iras limit annual contributions 