Tax-Deferred Income

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Tax-deferred income refers to income that is not subject to income tax in the year it is earned, but rather is taxed at a later time. Examples of tax-deferred income include contributions to certain retirement accounts, such as traditional IRAs, 401(k)s, and annuities.

In these types of accounts, contributions are made with pre-tax dollars, meaning that they are not included in the taxpayer’s taxable income for the year. Instead, the contributions and any investment earnings grow tax-deferred until the funds are withdrawn, typically during retirement.

At that time, the funds are subject to income tax at the taxpayer’s then-current tax rate. By deferring taxes on income, taxpayers may be able to reduce their current tax liability and potentially pay a lower tax rate when the funds are withdrawn in the future.

It is important to understand the rules and regulations related to tax-deferred income to accurately report and calculate taxable income and determine the appropriate amount of taxes owed to the government.

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