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Tax-deferred: What it means & types of 'tax later' accounts

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Personal finance isn't just about saving and spending money. It's also about incorporating tax efficiency into your larger financial strategy so your money can grow over time.

Tax-deferred, or "tax-later" accounts, are an essential component of tax efficiency. But what does that mean, and what kinds of accounts qualify? In the following sections, we'll examine these accounts, how they benefit your savings and the types of accounts that allow you to leverage this advantage.

What does tax-deferred mean?

The term refers to investments where you postpone paying taxes on asset growth until a later date rather than in the year the investment earns income. This simple concept allows your investments to grow without the immediate burden of taxes, which can significantly enhance the compounding effect over time.

How do tax-deferred accounts work?

With tax-deferred retirement accounts, contributions are typically deductible now. As the money in the account generates returns, you don't pay taxes on the earnings. Instead, you pay taxes on both the principal and earnings when you start taking withdrawals from the account in retirement—ideally when you're in a lower tax bracket.

What are the other 'tax buckets' and their differences?

Tax-later accounts are one piece of the puzzle. It's crucial to recognize the other tax buckets to optimize your financial strategy for tax efficiency:

Coordinating these tax buckets through diversification allows you to manage your tax liability across different stages of life.

Examples of tax-deferred retirement accounts

Here's a closer look at the different types of tax-later retirement accounts.

Traditional IRAs

traditional IRA generally allows you to make pre-tax contributions, reducing your taxable income for the year you make the contributions. The tax-sheltered growth allows your investments to compound more effectively over time.

  • Contribution limits: For 2024, the contribution limit is $7,000, with an additional catch-up contribution of $1,000 for those age 50 and older.
  • Early withdrawal penalties: If you withdraw funds before age 59½, the withdrawal is taxable income and subject to a 10% early withdrawal penalty. However, there are some exceptions.
  • Required minimum distributions (RMDs): Account holders must take minimum distributions, which are taxed as ordinary income, starting at age 73 (assuming you reached age 73 after Dec. 31, 2022).

Traditional 401(k) and 403(b) plans

Traditional 401(k) and 403(b) accounts are employer-sponsored retirement plans that allow you to make pre-tax contributions directly from your paycheck, reducing your taxable income. The money grows until you withdraw it in retirement.

  • Contribution limits: For 2024, the contribution limit is $23,000, with a catch-up contribution of $7,500 for those age 50 and older.
  • Early withdrawal penalties: Similar to IRAs, early withdrawals are taxable and subject to a 10% penalty, with certain exceptions.
  • RMDs: RMDs also apply to these accounts, starting at age 73.

Examples of tax-deferred investment accounts

While tax-deferred retirement accounts are a cornerstone of retirement planning, other investment vehicles also can offer tax-sheltered growth. Here's an overview of some other tax-deferred investment options.

Deferred annuities—fixed and variable

Non-qualified deferred annuities are contracts with an insurance company designed to provide future income. Fixed annuities offer a guaranteed interest rate for a specified period. Variable annuities allow you to choose from a range of investment options, with returns dependent on the performance of these investments.

Both allow your investment to grow tax-deferred until you begin to receive payments.


Investing in stocks offers the potential for tax-deferred growth, particularly if you hold them for more than a year. At that point, any gain on the sale is considered a long-term capital gain. Note that taxes on capital gains are assessed at a lower rate than ordinary income, and you only pay taxes on these gains when you sell the stock. Stocks also may provide ongoing taxable returns, such as dividends.

Savings bonds

U.S. savings bonds, such as Series EE and Series I bonds, offer a low-risk investment option with tax-sheltered growth. The interest earned is exempt from state and local taxes and is federally tax-deferred until the bonds are redeemed or reach maturity. Additionally, the interest may be tax-free if used for educational purposes.

Craft your financial future with tax-later accounts

Tax-deferred investments allow your savings to compound over time without the drag of annual taxes. Diversifying your portfolio across different tax buckets—tax now, tax later and tax never—can help minimize the risk of a high tax burden in retirement. Remember, taxation is inevitable when it comes to retirement savings. The strategy lies in managing when you owe taxes and how much you'll pay.

If you could use a hand balancing your tax-deferred investments, work with a Thrivent financial advisor to develop a plan to ensure your financial strategy is as tax-efficient as possible.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

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