Exactly what taxes are "deferred" in a simple plan and a 401K. (qualified plans)?

In NY state.

There are two things going on.

1. Contributions to qualified plans are made, pre-tax, meaning that no income tax is due on the amounts. Later when the funds are withdrawn you will pay income taxes on the distributions.

2. Income and capital gains inside the qualified plans are tax sheltered, which allows your money to grow much faster than if it your income and gains were taxed each year as they would be in a standard account. For a young person, this will be a huge benefit over time since you can reinvest all of your gains without having to pay Uncle Sam first. It's less of an advantage for an older taxpayer or one who expects to be in a high bracket upon retirement.

Any time monies change hands they are to be taxed. When you have a 401k plan thru your employer, your federal taxes on the money earned are deferred. When you withdraw the money or when you qualify for payment, you will be taxed at that time.

The income taxes. Whatever tax bracket you fall into, your 401K or IRA savings portion is exempt. However, if you withdraw from either account before retirement age, you are subject to a penalty and all applicable taxes.

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