How does tax deferral work? Why is it beneficial?
Tax deferral refers to investment earnings such as interest, dividends or capital gains that accumulate free from taxation until the investor withdraws/takes possession of them. Investors benefit from tax deferral in two important ways: • Instead of paying taxes on the return of the investment, tax is paid only at a later date, allowing the investment to grow over time. • Investments are typically made when an investor is earning a higher income and is taxed at a higher rate. Withdrawals may then be made after retirement, when a person expects to be earning little income and, therefore, may be taxed at a low rate.
