Income tax is due only later when money is withdrawn.
Tax-deferred plans are the most powerful investment vehicles available to working Americans. The principal comes from before-tax income and the returns are reinvested untaxed. Taxes are paid only when the money is withdrawn, usually on retirement, years or decades after it is deposited. The example of Prof. B. B. Boehmer illustrates the point. Prof. Boehmer faces a choice of investment alternatives.