Tax-deferred is when you don’t have to pay taxes on a particular account as long as your money remains in it. You wait to pay the tax until you take the money. Once you withdraw your money, it’s up for grabs and the IRS can begin to tax it.
Retirement plans are a great example. Money stashed away in annuities, 401(k)s, and IRAs is tax-deferred to varying degrees and can grow for decades until you reach your retirement age.
An annuity is a kind of tax-deferred retirement plan, but it’s usually operated through an insurance company. You pay the insurance company a certain amount of money, and in return that company promises to pay you back with interest over a period of time. An annuity is a simple way to save money for retirement without paying taxes on it right away.
You can pay into your annuity all at once (“lump sum”) or in a series of payments. Depending on your contract, an annuity might start paying you back right away or start at a later date – such as when you plan to retire.