Understanding Tax-Deferred Benefits

Defined contribution (DC) retirement plans are often misunderstood to be tax-free, when in fact they are tax-deferred. There’s a big difference between a tax deferral and a tax deduction or exclusion.

What’s not misunderstood is the value of tax incentives to encourage retirement saving: in a recent ICI survey, nearly nine out of 10 DC–owning households said that the tax treatment of their retirement plans was a big incentive to contribute.

Tax-Deferred, Not Tax-Free

Commentators frequently refer to the “tax-free” treatment of retirement savings, equating retirement-savings contributions to employer-paid health benefits (which are excluded from income) and mortgage interest (which is deducted from income). Such commentators assert that, for example, the tax savings from a $1 tax-deferred contribution is 3.5 times greater for a taxpayer in the 35 percent tax bracket than for a taxpayer in the 10 percent bracket.

Such assertions are incorrect. Unlike income that is excluded or deducted from taxes, deferred compensation is eventually taxed when it is withdrawn from a retirement account—meaning that the benefits of tax deferral cannot be calculated in the same way as benefits of an exclusion or deduction. The benefits calculation for tax-deferred compensation, such as 401(k) contributions, is not just a function of the individual’s marginal tax rate; it’s also one that involves the uncertain effects of time and rates of return.

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Research

American Views on Defined Contribution Plan Saving, 2020 (pdf)

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Research

American Views on Defined Contribution Plan Saving, 2019 (pdf)

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Research

American Views on Defined Contribution Plan Saving, 2018 (pdf)

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Tax Incentives Encourage Saving

American households strongly believe that lawmakers should maintain current tax incentives for retirement savings. Research from ICI consistently finds that about 80 percent of surveyed households—whether they hold a retirement account or not—agreed that retirement-savings incentives should continue to be a national priority.

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Research

American Views on Defined Contribution Plan Saving, 2020 (pdf)

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News Release

Americans Continue to Value Defined Contribution Plan Structure and Features

Americans Continue to Value Defined Contribution Plan Structure and Features Washington, DC; January...
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Research

American Views on Defined Contribution Plan Saving, 2019 (pdf)