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What is a Deferred Account?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 September 2016
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Deferred accounts are plans or accounts that make it possible to accumulate resources in the plans without the need to pay taxes during the period of accumulation. The payment of applicable taxes is deferred or postponed until a later date, usually when the account holder begins to make withdrawals. Many types of retirement plans, including the IRA and 401(k) plans, are structured as a deferred account.

One of the main benefits to a deferred account structure is the ability to postpone or defer the tax liability until a later date. Any funds that are placed into the deferred account are deducted from the annual income of the account holder and are not subject to taxes during the current tax year. This benefit helps to encourage people to save for later years, since the amount of funds placed in a deferred account impacts the total tax liability due for the tax year. The postponed taxes are calculated based on the amount of funds withdrawn from the account during a calendar year, rather than assessing the entire balance at the time of retirement. Along with making it easier for people to save, the deferred account arrangement also eases the individual tax burden.

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Even in later years when the account holder begins to receive regular payments from the deferred account, it is possible to structure the payments so that the amount of funds received during given tax period do not represent a considerable tax burden. This can be especially important if the individual has created more than one revenue stream for use during the retirement years. Balancing the amount received from each stream to create the most advantageous tax situation helps to ensure there is enough money to cover basic living expenses without having to pay a great deal of taxes along the way.

In general, any type of deferred account has some mechanism in place for growing the balance in the account in some manner other than contributions from the paycheck. In the case of a corporate-sponsored retirement plan, the employer may match any amount placed into the account by the employee. In the case of an IRA, the account holder earns interest on the balance of the account periodically.

Between postponing taxes and the opportunity to grow the balance through accruing interest or matching contributions, a deferred account is an excellent way to prepare for the future. If some type of deferred account is not available through an employer, it is possible to establish an account of this type through a local bank.

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