How can tax deferral boost your retirement income?

January 5, 2024

Learn how your retirement income may benefit from tax deferral.

More than half of all working-age Americans have IRA or 401(k) accounts.There are good reasons for the huge popularity of these accounts and others, such as annuities. Chief among those reasons is that they’re typically tax deferred.* That tax status can be a bonus to many retirement accounts since your savings can grow for years without the need to pay taxes on it. Let’s take a look at how you might benefit from tax deferral.

First, some definitions. “Tax deferral” doesn’t mean “tax-free.” You’re almost always going to pay taxes at some point on the money you put into a tax-deferred account and on the interest, profits, dividends, or capital gains that money generates over the years. The only question is when you’ll pay. With tax-deferred accounts, you pay taxes when you withdraw the funds during retirement.2 The partial exception is a so-called “nonqualified” account, in which you invest with after-tax money and, upon making withdrawals,3 you pay taxes on your interest or other earnings.4

That’s a big deal because any income you put into a qualified plan directly lowers your taxable income by that same amount, which lowers your tax bill. That’s a benefit you get now, without waiting for your retirement. Sure, you generally can’t spend the money you just put into a tax-deferred account until retirement; but it’s not gone, just temporarily out of reach – and earning more money for you.

Tax deferral calculator

Use our tax deferral calculator to learn how non-qualified annuities could help reduce tax drag on investments and help achieve your financial goals.

In addition, tax deferral enables you to make more money over the years until your retirement through the power of compound interest. Beyond any immediate tax-bill savings, the money you put into a tax-deferred account makes money (such as interest), which then makes more money, over and over.

Here's an example. Say you contribute $22,500 a year to a 401(k). Assuming a growth of 6% annually, after 30 years, your account is worth $2,181,097. If you’d made the same contributions to a non-tax-deferred account with a tax rate of 20%, after 30 years, your account would be worth $1,701, 890. In this example, the tax-deferred account earns you an additional $479,207.5

Another way to save money with tax-deferred income is based on the tax bracket you’re in now and the bracket you may be in when you retire. Many people put money (before taxes) into their retirement accounts when their income bracket is relatively high and take the money out – and pay taxes on it – during retirement, when they are typically in a lower tax bracket. The lower bracket means they pay less in taxes.

On the other hand, anyone considering a tax-deferral strategy should also be aware of other factors. For example, tax-deferred accounts such as IRAs generally come with penalties of 10% if you take money out before you’re 59 ½ .6 If you think of your retirement savings as a rainy-day fund that you could use at any time, this could be a concern for you.

Here’s something else to keep in mind: Although you’re likely to be in a lower tax bracket when you retire and make withdrawals, what if you’re not? Those who want to maintain their full standard of living in retirement may need to take large distributions that are equal to their previous annual earnings. That could keep them in comparable tax brackets, costing them some of the benefits of tax deferral. Worse, the familiar deductions they used to have to offset their high bracket (e.g., mortgage, child credit, or single-filer rate for widows/widowers/divorcees) may no longer be available to them.

What’s the best course for you? Diversification of pre-tax and after-tax accounts is a plus because you can draw on the distinct advantages of each when you need it. For example, you can draw more heavily from pre-tax accounts when your bracket is low and draw on after-tax accounts when your bracket is high to moderate your overall tax bill. Also, you’ll want to identify your risk appetite toward retirement and what investments align with it.

As always, we suggest you work with a trusted financial professional.

Annuities are long-term, tax-deferred vehicles designed for retirement and are insurance contracts. Variable annuities and registered index-linked annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met. Add-on living benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity and may be subject to conditions and limitations. There is no guarantee that a variable annuity with an add-on living benefit will provide sufficient supplemental retirement income.

*Tax deferral offers no additional value if an IRA or a qualified plan, such as a 401(k), is used to fund an annuity and may be found at a lower cost in other investment products. It also may not be available if the annuity is owned by a legal entity such as a corporation or certain types of trusts.

1. “New Data Reveal Inequality in Retirement Account Ownership.” Census. August 31, 2022. 

2. “Let your savings reach their full potential with tax-deferred accounts.” Empower. November 16, 2021. 

3. Qualified vs. Nonqualified Retirement Plans: What’s the Difference?, December 31, 2020.

4. Ibid 

5. “Five Key Tax-Planning Strategies.” Jackson. July 2023.

6. “Tax Deferred: Earnings With Taxes Delayed Until Liquidation.” Investopedia. November 20, 2022.



Before investing, investors should carefully consider the investment objectives, risks, charges, and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses provide this and other important information. Please contact your financial professional or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.

Jackson, its distributors, and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Tax laws are complicated and subject to change. Tax results may depend on each taxpayer’s individual set of facts and circumstances. Clients should rely on their own independent advisors as to any tax, accounting, or legal statements made herein.

Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York).  Annuities are distributed by Jackson National Life Distributors LLC, member FINRA. These contracts have limitations and restrictions. Jackson issues other annuities with similar features, benefits, limitations, and charges. Contact Jackson for more information.

Jackson® is the marketing name for Jackson Financial Inc., Jackson National Life Insurance Company®, and Jackson National Life Insurance Company of New York®.