Talk to an Advisor

Tax-Deferred Growth

Tax-deferred growth is a key concept in the retirement planning and investment industries, particularly when it comes to Individual Retirement Accounts (IRAs) and other types of retirement savings vehicles.

In the context of an IRA, tax-deferred growth refers to the way in which any earnings or gains within the account (such as interest, dividends, or capital gains) are not taxed at the time they are earned. Instead, the taxes on these earnings are deferred, or postponed, until the investor starts withdrawing money from the account, typically in retirement.

This allows the investor’s money to grow faster than it would in a taxable account, because all of the money, including what would have been paid out in taxes each year, remains in the account to earn even more.

In a traditional IRA, distributions in retirement are taxed as ordinary income. In a Roth IRA, contributions are made with after-tax dollars, so qualified distributions in retirement are tax-free, offering tax-free growth as opposed to tax-deferred growth.

The benefit of tax-deferred growth is that many people will be in a lower tax bracket in retirement than during their working years, so they may pay less tax on the money when it’s withdrawn compared to what they would have paid when it was earned. However, this may not be the case for everyone, and the tax situation can also depend on future changes in tax law.