Top examples of tax-deferred investment accounts explained for smarter investing

Real-world examples of tax-deferred investment accounts explained upfront

Most people hear “tax-deferred” and think only of a 401(k). That’s one example of a tax-deferred investment account, but it’s far from the only one. In practice, examples include workplace plans, individual retirement accounts, and even a few options many investors overlook.

Here are several of the best examples of tax-deferred investment accounts explained in context:

• A 35-year-old software engineer maxing out a traditional 401(k) at work.
• A self-employed designer using a SEP IRA to shelter a big chunk of her freelance income.
• A high-earning couple funding a traditional IRA and rolling over old 401(k)s from past jobs.
• A small business owner using a SIMPLE IRA instead of a full 401(k) plan.
• A physician contributing to a 403(b) and a 457(b) through a hospital system.
• A long-time employee with a traditional pension (a defined benefit plan) that defers taxes until monthly payments start.

Each of these is an example of a tax-deferred investment account being used to reduce current taxes and boost long-term compounding.

Core examples of tax-deferred investment accounts explained in detail

Let’s walk through the most common examples of tax-deferred investment accounts explained with how they work, 2024–2025 numbers, and who they fit.

Traditional 401(k): The flagship example of tax-deferred investing

For many U.S. workers, the traditional 401(k) is the first and biggest example of a tax-deferred investment account.

How it works
You contribute pre-tax money from your paycheck. Those contributions reduce your taxable income for the year. Investments grow tax-deferred, and you pay ordinary income tax only when you withdraw the money in retirement.

Key 2024–2025 details
The IRS adjusts limits regularly. For the latest contribution limits, check the IRS retirement plans page: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
As of my latest update, workers can typically contribute tens of thousands of dollars per year, with an extra catch-up contribution allowed for people age 50 and older.

Why it matters
This is one of the best examples of tax-deferred investment accounts because:

• Contributions may reduce your current tax bill significantly.
• Many employers match a portion of your contributions, which is effectively free money.
• Investment growth is sheltered from annual income taxes and capital gains taxes until withdrawal.

Common mistake
Stopping contributions once you hit the employer match. For many high earners, it can make sense to push contributions up to the annual IRS limit, not just the match level.

Traditional IRA: The individual example of tax-deferred investment accounts

The traditional Individual Retirement Arrangement (IRA) is a flexible, widely available example of a tax-deferred investment account that doesn’t require an employer.

How it works
You open an IRA with a brokerage or bank and contribute from your own funds. Contributions may be tax-deductible depending on your income and whether you or your spouse is covered by a workplace plan. Investments grow tax-deferred, and you pay income tax on withdrawals.

Contribution limits
The IRS posts current IRA limits here: https://www.irs.gov/retirement-plans/ira-deduction-limits
These limits are much lower than 401(k) limits, but they are still meaningful, especially when compounded over decades.

Who it fits

• Workers without access to a 401(k).
• People who want to roll over old 401(k) balances into one consolidated account.
• High earners who may use a traditional IRA as part of a backdoor Roth strategy (with careful tax planning).

This is one of the best examples of tax-deferred investment accounts for people who want full control over investment choices, since most brokerages offer broad menus of stocks, bonds, and funds.

SEP IRA: A powerful example of tax-deferred investing for the self-employed

The Simplified Employee Pension (SEP) IRA is a workhorse example of a tax-deferred investment account for freelancers, consultants, and small business owners.

How it works
The business makes contributions to SEP IRAs for eligible employees (including the owner). Contributions are tax-deductible to the business, and investments grow tax-deferred until withdrawal.

Why it stands out
Among the best examples of tax-deferred investment accounts for the self-employed, a SEP IRA typically allows much higher contributions than a traditional IRA, often up to a percentage of compensation, subject to an annual dollar cap set by the IRS.

Real example
A self-employed architect with variable income might skip contributions in a lean year, then make a large SEP IRA contribution in a strong year to reduce taxable income and build retirement savings.

For current limits and formulas, see the IRS SEP overview: https://www.irs.gov/retirement-plans/plan-sponsor/sep

SIMPLE IRA: A lean example of tax-deferred accounts for small employers

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another example of a tax-deferred investment account that targets small businesses.

How it works
Employees can contribute salary deferrals. Employers must either match contributions or make a fixed contribution for all eligible employees. Contributions and earnings grow tax-deferred.

Why employers use it
Compared with a full 401(k), a SIMPLE IRA is administratively lighter and cheaper to run, while still providing a meaningful example of tax-deferred investing for workers.

403(b) and 457(b): Important examples of tax-deferred investment accounts in the public and nonprofit sector

If you work for a public school, university, hospital, or certain nonprofits, your main examples of tax-deferred investment accounts may not be a 401(k) at all.

403(b) plans
Offered primarily by public schools, certain nonprofits, and some religious organizations. Functionally, a traditional 403(b) behaves much like a 401(k): pre-tax contributions, tax-deferred growth, and taxable withdrawals.

457(b) plans
Common for state and local government employees and some nonprofit executives. Contributions are typically pre-tax and grow tax-deferred, but 457(b) plans often have different withdrawal rules, especially around early distributions.

Power combo example
A physician employed by a large hospital system might contribute to both a 403(b) and a governmental 457(b), stacking two examples of tax-deferred investment accounts to shelter a significant portion of income each year.

For plan rules and updates, the IRS maintains a resource page for 403(b) and 457(b) plans: https://www.irs.gov/retirement-plans

Traditional pension plans: The old-school example of tax-deferred income

Defined benefit pension plans are less common in the private sector today, but they remain a classic example of tax-deferred investment accounts in the broad sense.

How it works
Your employer funds a pool of assets and promises you a specific benefit in retirement, usually a monthly payment. You typically don’t pay tax while the pension grows. Instead, you pay income tax when you receive the pension payments.

Why it matters
Even if you don’t control the investments, a defined benefit plan is still an example of tax-deferred retirement income. Many public sector workers and older corporate employees rely on these payments alongside Social Security and personal savings.

How tax deferral actually boosts your long-term returns

To understand why these examples of tax-deferred investment accounts are so valuable, it helps to look at the math.

Imagine two investors:

• Investor A uses a taxable brokerage account.
• Investor B uses a tax-deferred account like a traditional 401(k).

Both invest the same pre-tax amount each year and earn the same pre-fee, pre-tax return. Investor A pays taxes on interest, dividends, and realized capital gains annually. Investor B pays no tax while the money grows.

Over 30 or 40 years, the tax drag on Investor A’s account can be significant. Investor B’s tax-deferred account compounds on a larger base because nothing is shaved off each year for taxes. Even though Investor B will eventually pay income tax on withdrawals, the benefit of decades of untaxed compounding often outweighs the later tax hit—especially if withdrawals happen in a lower tax bracket in retirement.

This is why financial planners often prioritize funding at least some of the best examples of tax-deferred investment accounts before building large taxable portfolios.

Key rules that apply across most examples of tax-deferred investment accounts

Different plans have different wrinkles, but most examples of tax-deferred investment accounts share a few core features.

Tax treatment of contributions and withdrawals

• Contributions are usually made pre-tax or are tax-deductible, lowering your taxable income in the year of contribution.
• Growth inside the account is not taxed annually. You do not owe tax on dividends, interest, or capital gains as long as the money stays in the account.
• Withdrawals are taxed as ordinary income, not capital gains, once you take money out in retirement.

This is the trade-off at the heart of all these examples of tax-deferred investment accounts: you get a tax break today in exchange for paying tax later.

Early withdrawal penalties

Most tax-deferred accounts are designed for retirement, so early withdrawals (generally before age 59½ in the U.S.) can trigger a 10% penalty on top of income tax. There are exceptions for certain situations such as disability, some medical expenses, and specific higher-education or home-purchase costs, depending on the account type.

The IRS explains early distribution rules for IRAs and workplace plans here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

Required minimum distributions (RMDs)

Another shared feature of many examples of tax-deferred investment accounts is the requirement to start taking money out later in life. The U.S. has raised the starting age for RMDs in recent years, and the rules can differ by account type.

Once you reach the applicable RMD age, you must withdraw at least a minimum amount each year, which becomes taxable income. This prevents tax-deferred money from remaining untaxed indefinitely.

Strategy: How to prioritize different examples of tax-deferred investment accounts

With multiple examples of tax-deferred investment accounts available, the question becomes: which should you fund first?

A common framework advisors use in practice:

• Grab the employer match in your 401(k), 403(b), or SIMPLE IRA. This is often the highest-return move you can make.
• Consider maxing your 401(k) or similar plan if you’re in a high tax bracket. Deferring income can be especially powerful at higher marginal rates.
• Add a traditional IRA (or Roth IRA, depending on your situation). This gives you more flexibility in investment choices and future tax planning.
• For the self-employed, prioritize SEP IRAs or solo 401(k)s. These examples of tax-deferred investment accounts can allow very high contribution levels.
• Use taxable brokerage accounts for surplus savings and flexibility. Once you’re using the best examples of tax-deferred investment accounts, taxable accounts can fill in the gaps.

The right order depends on your income, employer benefits, and expected future tax bracket. Many investors also mix tax-deferred accounts with Roth accounts (tax-free withdrawals) to create tax diversification in retirement.

2024–2025 trends affecting tax-deferred investment accounts

A few developments are shaping how investors use these accounts today:

Higher contribution limits
The IRS continues to adjust contribution limits for inflation. For high earners, this makes examples of tax-deferred investment accounts even more attractive, because more income can be sheltered each year.

Auto-enrollment and auto-escalation
More employers are automatically enrolling workers into 401(k) and 403(b) plans and gradually increasing contribution rates. This means millions of workers are now participating in tax-deferred accounts who might not have enrolled on their own.

More low-cost investment options
Plan menus increasingly include low-fee index funds and target-date funds. This improves the quality of many workplace examples of tax-deferred investment accounts, reducing the drag of high fees.

Policy changes and RMD rules
Recent U.S. legislation has shifted RMD ages and rules around some retirement accounts. Investors should review current guidance periodically or work with a professional to make sure their withdrawal strategy aligns with updated regulations.

FAQs about examples of tax-deferred investment accounts explained

What are some common examples of tax-deferred investment accounts?

Common examples include traditional 401(k) plans, traditional IRAs, SEP IRAs, SIMPLE IRAs, 403(b) plans, 457(b) plans, and traditional defined benefit pension plans. All of these accounts allow investments to grow without annual taxation, with income tax due when you withdraw funds.

Is a Roth IRA an example of a tax-deferred investment account?

No. A Roth IRA is not an example of a tax-deferred account; it is a tax-free account. You contribute after-tax money, and qualified withdrawals are generally tax-free. With tax-deferred accounts, you usually get a deduction upfront and pay tax later. With Roth accounts, you pay tax upfront and avoid tax later.

What is an example of using multiple tax-deferred accounts in one plan?

A high-earning public-sector employee might contribute to a 403(b) and a governmental 457(b) at the same time, while also funding a traditional IRA. That combination uses several examples of tax-deferred investment accounts to shelter a large portion of income and build retirement savings in parallel.

Are tax-deferred investment accounts always better than taxable accounts?

Not always. The best examples of tax-deferred investment accounts can be very powerful, but they come with trade-offs: limited access before retirement age, early withdrawal penalties, RMDs, and ordinary income taxation on withdrawals. For goals that require flexibility or for investors expecting much higher tax rates later, a mix of tax-deferred, Roth, and taxable accounts can be more effective.

How do I decide which example of a tax-deferred investment account to use first?

Start by looking at what your employer offers and whether there is a match. That workplace plan is often the first example of a tax-deferred investment account to fund. Then consider your income level, whether you’re self-employed, and your expected future tax bracket. A tax professional or fee-only financial planner can help you prioritize the right accounts for your specific situation.

Tax deferral is not a magic trick; it’s a timing strategy. By understanding the best real-world examples of tax-deferred investment accounts explained here—401(k)s, IRAs, SEP and SIMPLE IRAs, 403(b)s, 457(b)s, and pensions—you can decide where each one fits in your long-term plan and use the tax code in your favor instead of letting it work against you.