Every dollar you lose to annual taxes is a dollar that stops working for your future.
Tax-deferred growth is a strategic financial approach where your investment earnings — such as interest, dividends, or capital gains — accumulate without being taxed in the year they are earned. Instead of losing a portion of your gains to the IRS every April, that money remains in your account. This allows you to postpone your tax liability until a later date, typically when you withdraw the funds during retirement.
For entrepreneurs and families, utilizing tax-deferred vehicles like 401(k)s, IRAs, or indexed universal life (IUL) insurance could, depending on individual circumstances, mean the difference between a modest nest egg and a truly secure legacy.
Learn how tax-deferred investments can help you gain greater control over your financial trajectory.
What does “tax-deferred” mean?
When you choose a tax-deferred investment, you postpone your tax payments until a later date, usually at retirement. While traditional investments require you to pay taxes every year, tax-deferred accounts allow you to keep your money growing until you withdraw the funds.
Because you may not be paying taxes on gains annually (which could be upwards of 20% or 30%), depending on your tax rate and account type, that money remains in your account to earn even more interest. Over 20 or 30 years, this difference can be meaningful, depending on returns, taxes, fees, and withdrawals.
Examples of tax-deferred investments
There’s no “one-size-fits-all” strategy for tax-deferred savings. You’ve likely heard of a number of these tax deferral strategies without necessarily realizing that’s what they are. Most successful families use a combination of these vehicles to protect their assets and ensure retirement readiness.
1. Cash value life insurance
Permanent life insurance — including indexed universal life, variable universal life (VUL), and whole life — provides a death benefit and may offer tax-advantaged cash value accumulation, subject to policy terms and costs. A portion of your premium builds cash value that grows on a tax-deferred basis, subject to policy charges and crediting limitations.
When structured correctly, you can access this cash value through policy loans or withdrawals. Withdrawals are generally tax-advantaged up to your cost basis — the sum of all the premiums you’ve paid — while policy loans let you borrow against the death benefit, which generally do not trigger current income tax if the policy remains in force and is not a modified endowment contract. This provides a flexible, private source of liquidity that may support your family’s long-term security.
2. Employer-sponsored retirement plans
Employer-sponsored plans, such as 401(k), 403(b), and 457(b), are among the most common ways to achieve tax-deferred growth. These plans allow you to contribute pre-tax dollars directly from your paycheck, which lowers your taxable income today. For example, if you earn $100,000 and contribute $20,000 to your plan, the IRS only taxes you as if you earned $80,000.
Once the money is in your account, it grows tax-deferred, meaning you don't pay any taxes on interest, dividends, or capital gains year over year. You only pay ordinary income tax when you take distributions in retirement.
While 401(k) plans are typical for private companies, 403(b) plans serve non-profits and schools, and 457(b) plans are designed for state and local government employees — each offering a structured path to build wealth over time.
3. Traditional IRAs
A traditional individual retirement account (IRA) is a personal savings plan that offers significant tax-deferred benefits outside of an employer’s ecosystem. Depending on your income level and whether you or your spouse are covered by a retirement plan at work, your contributions may be fully or partially tax-deductible. This provides an immediate tax break by reducing your adjusted gross income for the year you contribute.
Once funds are inside the IRA, they grow tax-deferred, meaning you won’t face a tax bill on the account's earnings as long as the money remains in the plan. This allows your investments to compound more effectively over time; however, it’s essential to note that these accounts have strict annual contribution limits and may incur penalties for early withdrawals.
4. Annuities
Annuities are contracts with insurance companies that provide a steady stream of income, often used to ensure retirement readiness. A unique advantage of annuities is that they typically have no IRS-mandated contribution limits, making them an attractive option for high earners who have already maxed out their 401(k)s or IRAs.
The earnings within an annuity grow tax-deferred, allowing your principal to compound without annual tax hits. There are three primary types to consider:
- Fixed annuities: These provide a set, guaranteed interest rate for a specific period, offering the most predictability.
- Variable annuities: These allow you to invest in sub-accounts with direct market exposure, offering higher growth potential but also higher risk.
- Indexed annuities: These provide returns linked to a market index (like the S&P 500) while protecting against losses during market downturns.
It is important to note that while growth is tax-deferred, withdrawals are eventually taxed as ordinary income — not at the lower capital gains rate — which can impact your overall tax strategy.
5. Health spending accounts (HSAs)
If you’re enrolled in a high-deductible health plan (HDHP), you’re eligible for an HSA, a distinctive personal savings vehicle. While designed to help you pay for out-of-pocket medical costs, it has evolved into a powerful long-term wealth tool.
Unlike other accounts, an HSA is portable — the balance rolls over year after year, and you keep the account even if you change employers. HSAs are frequently called “triple tax advantaged” because they offer a rare combination of tax benefits:
- Tax-deductible contributions: Money goes in pre-tax, which lowers your taxable income for the year.
- Tax-deferred growth: Any interest or investment earnings within the account grow without being taxed.
- Tax-advantaged withdrawals: Distributions are completely tax-free as long as they are used for qualified medical expenses.
Taxable vs. tax-deferred vs. tax-advantaged investments
Choosing the right account involves balancing the need to pay taxes against the level of flexibility required. Taxable accounts offer liquidity but face annual taxes on gains. Tax-deferred accounts delay taxes until retirement to maximize compounding, while tax-advantaged accounts (which may include properly structured IULs) use after-tax dollars now to provide potentially tax-advantaged access later.
Pros and cons of tax-deferred investment
Tax deferral is commonly used as a strategy to enhance long-term compounding because it keeps your money working for you instead of being siphoned off by annual taxes. While these compounding benefits are significant, tax-deferred investments can come with trade-offs regarding liquidity, future tax rates, and strict IRS regulations.
The following table breaks down the primary advantages and potential drawbacks of using tax-deferred vehicles in your financial strategy.
Amplify your savings potential with tax-deferred growth
Whether you’re maximizing employer-sponsored plans, utilizing IRAs, or leveraging the unique benefits of permanent life insurance, the goal is the same: To keep more of your money working for you over the long term. It’s important to understand potential trade-offs between different accounts — and the importance of professional setup — so that you can create a diversified strategy that protects your family while preparing for a secure retirement.
Amplify offers a digital-first approach to IUL insurance, specifically designed to be one option for individuals seeking tax-advantaged growth through permanent life insurance. Our policies offer the security of a death benefit, alongside a cash value component that features a 0% floor on index crediting (before policy charges) to protect against market losses and a cap of up to 9% for potential upside (the caps may change and are not guaranteed).
Discover how Amplify can structure your IUL insurance to offer a flexible, tax-efficient approach to building wealth that isn't subject to the strict contribution limits of traditional retirement accounts.
