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.
A Keogh plan (named after U.S. Representative Eugene Keogh) is a type of tax-deferred retirement plan specifically for small businesses or people who are self-employed. It allows you to set aside a certain amount from your income before it is taxed, so that you can rack up savings while saving money on your taxes today. Meanwhile, you’re accumulating the cash you’ll need when you stop working in the future.
The plan is tax-deferred, not tax-free, so you will eventually have to pay Uncle Sam when you start withdrawing that money.