What is a 401K tax deferrel?

A 401(k) tax deferral refers to the ability to postpone paying taxes on contributions made to a 401(k) retirement savings account until withdrawals are made, typically during retirement. This means that the money you contribute reduces your taxable income for the year in which it is contributed. Additionally, any investment gains within the account also grow tax-free until withdrawal, allowing for potentially greater accumulation of savings over time. Withdrawals are taxed as ordinary income when taken out, usually at a lower tax rate if the individual is in a lower income bracket during retirement.