What does the term "tax deferral" refer to?

Tax deferral refers to the practice of postponing taxes on certain income or gains until a later date. This means that rather than paying taxes in the year the income is earned or the gain is realized, the tax liability is delayed, allowing individuals or businesses to keep that money in their accounts for longer. This is often seen in various retirement accounts, such as 401(k)s and IRAs, where contributions can grow tax-free until withdrawals are made in retirement when the account holder may be in a lower tax bracket.

By deferring taxes, taxpayers can benefit from potential growth on their investments, leading to a larger sum available when it is finally taxed. The timing of tax payments can significantly impact an individual's financial planning and cash flow management.

The other choices do not accurately represent the concept of tax deferral. Immediate payment of taxes owed indicates no postponement, a strategy to reduce taxable income focuses on deductions and credits rather than the timing of taxes, and claiming deductions retroactively involves tax filing rather than delaying tax obligations.