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What Is a Tax Deferral?

Jeff Janson, CFP, AIFA, is a Senior Wealth Advisor at Summit Wealth Partners

What Is a Tax Deferral?

» by Jeffrey Janson, CFP®, AIFA®, Senior Wealth Advisor

Taxes play a key role in any long-term investment plan. While you can’t avoid them entirely, you can keep more money in your pocket today and pay less in taxes later with a deferral technique. Learn what a tax deferral is and how it benefits your long-term investment plan.

Understanding Tax Deferrals 

Tax deferral is the process of postponing your taxes to a later date, which could be months or decades in the future. Short-term tax deferrals give you more time to file your tax return without facing penalties, and they have no impact on the amount paid. Long-term tax deferrals are a strategic move that allows you to earn interest on untaxed income over time.

Long-term tax deferrals are especially beneficial for high-income individuals who will drop tax brackets in retirement. These individuals can put more money into a retirement savings plan by avoiding income tax, earn more interest over time on these tax-free contributions, and pay tax on withdrawals when their income is lower after retirement.

Over time, compound interest on pre-tax income instead of taxed income can significantly increase your overall savings.

What Tax Deferral Techniques Can You Use?

There are several ways to defer income tax, and they each come with benefits and drawbacks. Here are a few tax deferral techniques to consider.

Contribute to a Tax-Deferred Savings Plan

Tax-deferred savings plans allow you to deposit pre-tax income into an account and earn interest over an extended period, typically until you reach retirement age.

Traditional IRAs

An individual retirement account (IRA) is a tax-deferred savings account that isn’t connected to a person’s employment. Anyone can open an IRA through a broker or bank and contribute up to $6,000 each year.

Unlike Roth IRA contributions, traditional IRA contributions are tax deductible, which means you won’t pay income tax until you begin withdrawing money from your account. To avoid penalties, you must wait until age 59 and a half to begin withdrawals. You will owe income tax at your current tax rate at the time of withdrawal.

Employer-Sponsored Retirement Plans

Opening a traditional IRA is an excellent way to plan for retirement, but employer-sponsored plans typically offer more benefits, including 401(k), 403(b), and 457(b) plans. Unlike traditional IRAs, you often receive employer contributions that significantly increase your account balance. Additionally, you can currently contribute $20,500 to a 401(k) in 2022, or $14,500 more than a traditional IRA.

Health Savings Accounts (HSAs)

While HSAs are intended to help pay for medical care, they can function as a tax-deferred retirement account after you turn 65. Before then, you don’t pay taxes on contributions or withdrawals, but there are two stipulations:

  • You must use HSA withdrawals for qualified medical expenses.
  • You must have a high-deductible health plan (HDHP) and no other health insurance.

Your HSA contributions roll over each year and earn interest, making them similar to employer-sponsored retirement plans. They are taxed like traditional IRA withdrawals after age 65.

Invest in Employee Stock Options

If your employer offers company incentive stock options to employees, you can purchase shares at a discounted price without paying taxes on the profits, even if the market value is significantly higher. With other non-qualified options, you have to pay taxes on the difference between the market rate and your purchase price.

As long as you meet the criteria for a qualifying disposition, you only have to pay capital gains tax when you sell your incentive stock options.

Purchase Annuities

Annuities are long-term tax deferral options issued by an insurance company. You contribute the pre-tax income that your insurer invests and, in return, receive guaranteed payments after a specified period. Those payments are taxed as ordinary income, which means you’ll pay at your current tax bracket.

Purchase Whole Life Insurance

When you pay whole life insurance premiums, a portion of your payments accumulates interest in a cash-value account. You don’t pay taxes on your earnings until withdrawal, allowing your account to grow tax free. Designated beneficiaries can withdraw a benefit upon your death without paying income taxes.

Are you ready to take advantage of the many tax deferral techniques available? Schedule a free consultation with Summit today to learn about your options.

How To Defer Tax Filings

While long-term tax deferrals help you save money over decades, a short-term filing deferral can help you avoid late payment penalties this year. If you fail to file and pay your taxes by the deadline, these penalties can reach 25% of your owed tax amount.

Anyone can file for a tax extension before that year’s tax deadline, which has already passed for 2022. Filing for an extension gives individuals an extra six months to submit their taxes. If you have already filed for an extension but need professional help managing your tax responsibilities, Summit Wealth Partners can help.

Summit Wealth Partners Is Your Tax Deferral Guide

Preparing for retirement requires a long-term game plan. Summit helps you determine your financial goals and find the tax-deferred saving strategies that will yield the greatest return over time. We use a proven financial planning process to enhance our clients’ experiences and build the financial future they envision:


During our initial hour-long consultation, we assess your financial status and goals to determine whether we can provide value.


After we become partners, we start having personalized conversations. Our experienced advisors customize a financial strategy and provide actionable steps to align with your goals. 


Once we have all the pieces we need to begin working towards your financial goals, we implement your plan. We may provide cash flow analyses, investment monitoring, tax management, and more, depending on your individual needs.


While your investment grows, we provide regular check-ins using your preferred communication method. We stay up to date with your current situation and market fluctuations to pivot your plan accordingly.

Summit Wealth Partners has been helping individuals plan for the future and achieve their financial goals for nearly 40 years. As a fiduciary, we always act in your best interests and uphold the highest ethical standards. If you’re looking for an advisor who will be honest, transparent, and attentive throughout your partnership, let’s have a conversation. Contact us today to schedule your free consultation and learn more about the tax deferral strategies that are right for you.