Tax deferred accounts

In this time of crisis, you want to owe as little tax as possible and keep more money in your pocket. Using tax deferred accounts help you do just that! Tax deferred accounts come in a variety of shapes and sizes: retirement accounts, education accounts and health accounts, to name just a few.  When contributing to those plans you get additional tax deductions, you decrease your taxable income and you save money for your future needs!

What is a tax deferred account?

A tax-deferred account is a type of financial account that allows you to delay paying taxes on current income. These accounts are usually managed by a trustee such as a bank, an employer or another financial institution.

The tax deferred accounts offer many advantages:
1.    Your contributions are tax free (and for some plans , even tax deductible!)
2.    For some plans, your contribution immediately reduces your taxable income
3.    For some plans, your employer contributes money on your behalf (free money!)
4.    The income earned in the account (interest, dividends etc) grows tax free
5.    For some plans, the distributions are tax free when the plans requirements are met

1/ Tax deferred retirement accounts

With the current economic situation, it is unlikely that your social security benefits will be enough income to live on when you retire. Therefore, it is important to have a backup and contribute to private plans during your working years.
The most common tax deferred retirement plans are the employer-sponsored retirement accounts (401k, 403b). If you work for a large company, your employer may also contribute for you (employer match). Contributions are usually made automatically ever payday.  Once you reach age 59½, you can start to withdraw from the account without any penalties.
IRA, SEP or SIMPLE plans are retirement accounts you can open outside of your employer – usually with a bank or any major brokerage firms.  These plans are ideal for self-employed individuals.
A Roth IRA is good plan for younger people and those with a long-time horizon before retirement because future withdrawals will be tax-free.

To read more on retirement accounts -



Traditional Individual Retirement Account


Roth IRA

Simplified Employee Pension plan



Eligible Individuals
Employee & Self-employed with compensation

Employee & Self-employed with compensation

with AGI <$193,000 (MFJ) / $122,000 (S)

Employee & Self Employed with compensation
Individual Maximum Contribution

lesser of $6000 and taxable compensation

lesser of $6000 and taxable compensation

lesser of $56,000  and 25% of Self-employment income

lesser of $19,000 and compensation

Employer Maximum Contribution

lesser of $56,000 and 25% of Self employment income

3% of employee's compensation
Contribution tax deductible

Yes -

if AGI <$196K (MFJ)



Yes  -

contributions excluded from taxable income

Distribution taxable


Required minimum distributions at age 70.5


2/ Tax deferred education accounts

Education in the United States is not free and the cost of tuition is often astronomical! The
529 plans help you save on university tuition and the Coverdell plans on elementary tuition.  In addition, should your child choose not to attend college, you can usually transfer the 529 account to another beneficiary.

For more information on 529 accounts -

3/ Health Savings Account (

To support  your increasing cost of health care, the US government offers plans to save for your medical expenses. The funds you contribute to these accounts can be used to pay for a wide range of expenses such as medical bills for you and your family and even alternative treatments like acupuncture. Funding these accounts also give you a deduction on your tax return.

To read  more about HSA accounts -

To help you decide which plan will give you the best tax benefits, contact
Karine Bauer. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional. Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.
Bear in mind the date of this article as tax laws change over time.

Updated on: October 18th, 2020