What Is a Tax-Deferred Savings Account?

by Shanika Chapman ; Updated July 27, 2017

To encourage people to start saving for their retirement, the government offers a number of tax incentives, including tax-deferred savings accounts. A tax-deferred savings account allows you to contribute a certain amount of money pre-tax into a retirement account, which means the amount is subtracted from your taxable income. The contributions are taxed later upon withdrawal.

Types of Tax-Deferred Savings Accounts

Traditional IRAs, 401(k) retirement accounts and SEP IRAs are examples of tax-deferred savings accounts.

Deducting the Contributions

With an employer-sponsored 401(k) retirement account, the contributions are taken out of your paycheck before being taxed. With a traditional or SEP IRA, you may claim the deduction at the end of the year on a Form 1040.

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Contribution Limits

Contributions to a tax-deferred account are capped on an annual basis. For traditional IRAs, that limit is $5,000 per year if single, $10,000 if married and $6,000 if more than 50 years old.

Withdrawing

Your money is taxed once you begin making withdrawals. Typically, you cannot withdraw money until the age of 59 ½, or you will incur penalties.

Considerations

If you have an employer-sponsored retirement plan, as well as a traditional IRA, your IRA contributions may not qualify for a tax deduction. Review IRS Publication 590 for details.

About the Author

Shanika Chapman has been writing business-related articles since 2009. She holds a Bachelor of Science in social science from the University of Maryland University College. Chapman also served for four years in the Air Force and has run a successful business since 2008.

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