What Is Tax-Deferred?
Investment growth that isn't taxed until money is withdrawn, typically in retirement.
The Full Definition
Tax-deferred means investment growth and contributions aren't taxed in the year they occur — taxes are postponed until the money is withdrawn, usually in retirement. Traditional IRAs and 401(k)s are the most common tax-deferred accounts: contributions reduce your taxable income today, the balance compounds without an annual tax drag, and withdrawals are taxed as ordinary income later. The appeal is that many people expect to be in a lower tax bracket in retirement than during their working years, making the eventual tax bill smaller than the upfront savings.
Real-World Example
A $10,000 contribution to a Traditional 401(k) reduces your taxable income by $10,000 this year. That money then grows completely untaxed until you withdraw it in retirement, at which point it's taxed as ordinary income.