Investing can be a time consuming process, and it can be complicated and frustrating.  As an investor, you should take advantage of any tool that may help you ease some of the burden. With that being said, tax-deferred savings is one method that you can utilize to make your funds grow. 

With tax-deferred savings, you can postpone paying taxes, on any earnings in your tax deferred account, until you withdraw the funds.  By doing this, you can lower your current taxable income. Additionally, you may be able to benefit from being in a lower tax bracket when you do decide to withdraw the funds.

There are a number of different tax deferred savings plans, a well-known one is a 401(k) retirement plan.  This plan offers high maximum contribution limits, and the opportunity to save over time.  If your employer offers a matching 401(k) plan, it may be a good idea to make contributions, to the maximum amount.  If you leave your place of employment before you are eligible for retirement, you usually have the option of rolling your money over into an IRA.

Let’s take a look at an example.  If your monthly contribution is $250, at 6% interest, compounded annually, in 20 years it will grow to about $116,000 in a tax-deferred plan.  In a similar savings plan, that is not tax deferred, assuming a tax rate of 20%, you will only be making a $200 monthly contribution.  You will end up only saving around $93,000, without the tax-deferred plan, which is a difference of around $23,000.  Remember, you would be paying additional taxes each year on the earnings.  A tax deferred savings plan is a great way to see your nest egg grow; as long as you do not withdraw your money before you are 59 ½ , or you will incur a 10% penalty, on top of the taxes.

Any way you slice it, tax-deferred savings are a good way to prepare for you retirement. You may want to take advantage of the opportunity.