What is the difference between tax-deferred and tax-free?
A “tax-deferred” account is one that is funded with pre-tax dollars, which means, in most cases, that you get a deduction for your contributions. When distributions are taken from the account, those funds are taxed. Traditional, SEP, SIMPLE and Individual(k) Plans are referred to as “tax-deferred” accounts. By contrast, a “tax-free” account is one that is funded with after-tax dollars, which means that you do not receive a deduction for contributions. When distributions are taken, there are no taxes incurred in a tax-free account. The Roth IRA and the Coverdell Education plan are referred to as “tax-free” accounts.
