Tax-Deferred
Definition
An account or investment where you don't pay taxes on earnings until you withdraw the money, usually in retirement. Traditional 401(k)s and IRAs are tax-deferred — you get a tax break now but pay taxes later. The idea is that your tax rate in retirement will be lower than today.
Why It Matters
Tax-deferred accounts let your money compound without being reduced by annual taxes. In a taxable account, paying 15-20% on gains each year significantly reduces your ending balance. Deferring taxes gives you more capital working for you.
Example
Invest $10,000 in a tax-deferred account at 8% for 30 years: it grows to ~$100,627. In a taxable account paying 15% capital gains annually: ~$76,123. Same investment, same returns, but tax deferral gave you $24,000+ more.