Tax-Deferred Savings Plan

What is a 'Tax-Deferred Savings Plan'

A tax-deferred savings plan is a savings plan or account that is registered with the government and provides deferral of tax obligations. Tax-deferred savings plans may defer taxable income earned within the account either until withdrawal or until a particular date.

They are used most commonly in retirement savings accounts such as IRAs, 401(k)s and RRSPs, but are also available for education savings plans and other accounts.

BREAKING DOWN 'Tax-Deferred Savings Plan'

In Canada, the Registered Retirement Savings Plan (RRSP) is an example of a tax-deferred savings plan. The RRSP shelters what would normally be taxable income earned within the account until withdrawal. All profits within the account, including interest, dividends and capital gains, are taxed as income only upon withdrawal.

Essentially, tax-deferred savings plans allow you to use the taxes which would have gone to the government for investing. In the end, the taxes are paid, but not before the funds were used to make more money.