Posted on November 24, 2006 at 12:17:40:
Tax-deferred income lets you use your money longer before you have to give part of it back in taxes. The longer you get to use it, the more it is worth.
Retirement accounts like IRAs and 401(k)s let your money grow for many years; you don’t pay taxes until you take the money out. Deferred compensation allows employees to put off taking income – and put off the income taxes – if certain conditions are met. FICA taxes are taken out as the money is earned – and if income tops the Social Security wage base, that money may escape the tax.
What’s better than tax-deferral? Earnings that aren’t taxed at all! Health savings accounts, for instance, are tax-deductible and their earnings are tax-deferred. But withdrawals for medical expenses are tax free and, after age 65, all payouts are tax free. 529 and Coverdell education plans grow tax-deferred and withdrawals for qualified education expenses are tax-free, too.