Tax-Deferred Annuity: What Does It Mean?

A tax-deferred annuity is a contract with an insurance company that allows your contributions to grow without being taxed until you start taking withdrawals. This is different from a taxable investment account, where you owe taxes on dividends and gains each year. Common examples include 403(b) plans, which are often offered to teachers and nonprofit employees.

The "deferred" part is the key benefit: your money compounds on a larger base because taxes aren't taken out along the way. When you do eventually withdraw, the distributions are taxed as ordinary income, so the strategy works best when you expect to be in a lower tax bracket in retirement.