What does tax-deferred investment mean?

Tax-deferred investment refers to a financial arrangement where income earned on the investment is not taxed immediately but instead is postponed to a later date. This means that investors can allow their money to grow without the bite of taxes reducing their earnings on an annual basis. The delayed tax payment is often advantageous, as it can lead to larger sums of money compounding over time, ultimately providing more capital when the investor eventually pays taxes upon withdrawal or sale of the investment.

Other choices, such as tax breaks for foreign investors or double taxation on earnings, do not accurately describe the concept of tax deferral. A complete absence of taxes on income earned from an investment also misrepresents tax-deferred investments, as taxes will be applicable at a future date rather than being entirely exempt.