Taxes may be inevitable—but paying certain taxes can often be timed in your favor if you know how to employ the right tax deferral strategies for your situation.
Tax deferral strategies operate on a simple principle: money you don’t pay in taxes today can grow and compound over time through smart investments. This can create a snowball effect, allowing your wealth to potentially accumulate faster and more effectively in the long run.
Let’s say you defer $10,000 in taxes and invest that amount at a 7% annual return. After 10 years, that investment could grow to over $19,600. While you’ll eventually pay taxes on the gains, the opportunity for growth during the deferral period often outweighs the tax liability*.
Are Tax Deferral Strategies Right For Me?
Deciding if a tax deferral strategy is right for you often comes down to timing. When is the best time for you to pay certain taxes? Typically, tax deferral strategies tend to be more valuable if you anticipate being in a lower tax bracket in the future, such as during retirement.
It’s important to work closely with not only your CPA, but also your financial advisor, on the issue of timing. These two professionals can help ensure that both your short-term, year-to-year tax strategy and your long-term financial strategy are designed to help you save the most on taxes over the course of your lifetime.
7 Tax Deferral Strategies to Consider
Not all tax deferral strategies are created equal. The effectiveness of each depends on your values, goals, and current financial situation. Here are 7 of the more popular moves—explore them all and see which ones are right for you.
#1: Traditional 401(k) and IRA Contributions
There’s a reason why 401(k)s are the cornerstone of many Americans’ wealth-building strategies: they’re among the most effective and accessible tax deferral vehicles available today. Contributions made to a traditional 401(k) reduce your taxable income dollar-for-dollar and grow tax-deferred until you withdraw them in retirement. Many employers also offer matching contributions, giving you an immediate return on your investment.
For 2025, you can contribute up to $23,500 to your 401(k), with an additional $7,500 catch-up contribution if you’re 50-59 or 64+. Savers between the ages 60 and 63 have been granted an even higher catch-up contribution ($11,250) under the SECURE 2.0 Act.
Traditional IRAs offer very similar tax benefits as 401(k)s, although with significantly lower contribution limits. Additionally, income limits may affect your ability to deduct contributions if you’re also covered by a workplace retirement plan.
#2: Backdoor Roth Conversions
For higher earners who exceed income limits for direct Roth IRA contributions, a backdoor Roth conversion offers a creative solution. With this strategy, you make non-deductible contributions to a traditional IRA and then convert the account to a Roth IRA. This allows you to take advantage of tax-free growth and withdrawals in retirement, even if you don’t qualify for direct Roth IRA contributions.
A word of caution: while a backdoor Roth conversion is perfectly acceptable under current tax law, it does require strict adherence to some of the IRS’s more complex rules. Be sure to consult your tax advisor and financial advisor before pursuing this strategy.
#3: Tax-Deferred Annuities
Deferred annuities allow you to invest money that grows tax-deferred until you start taking distributions. Unlike retirement accounts, annuities have no annual contribution limits, making them an attractive option for high earners who’ve maxed out other tax-advantaged accounts.
There are several types of annuities to consider:
- Variable annuities offer investment options similar to mutual funds, with the potential for high returns but with market risk.
- Fixed annuities provide guaranteed growth rates, offering security and predictability for your investments.
- Index annuities combine the benefits of both, linking returns to a market index while offering downside protection.
Much like backdoor Roth conversions, annuities are complex financial instruments that can end up costing you more than you bargained for if you’re not careful. Work with your financial advisor to gain a clear understanding of an annuity’s terms and conditions before investing.
#4: Cash Value Insurance
Cash value life insurance is a dual-purpose financial tool designed to offer both the wealth accumulation potential of a tax deferral vehicle and the protection of an insurance product.
Under this type of insurance, the cash value of your policy grows tax-deferred over time. This means you won’t owe taxes on the growth as long as the funds remain within the policy. Additionally, under specific conditions, you may be able to access the cash value through loans or withdrawals that are tax-free, providing even more financial flexibility.
#5: 1031 Like-Kind Exchanges
Real estate investors can benefit from Section 1031 exchanges, which allow them to defer capital gains taxes on the sale of investment properties. By reinvesting the proceeds into similar properties within specific timeframes, you can defer taxes indefinitely while growing your real estate portfolio.
This strategy is especially effective for families looking to build generational wealth. When properties are passed down to heirs, they often receive a stepped-up basis, potentially eliminating deferred gains altogether. Learn about the benefits of stepped-up basis in estate planning.
This is another one of the trickier tax deferral strategies that requires following strict IRS rules, processes, and timelines. One missed step can easily turn into a major setback Make sure to have your attorney, CPA, and financial advisor guide you through the process.
#6: Non-Qualified Deferred Compensation Plan
Non-qualified deferred compensation (NQDC) plans allow business owners and high-earning professionals to defer salary, bonuses, or other income to future years. This strategy can work well if you anticipate being in a lower tax bracket later or want to control the timing of your income.
However, unlike qualified retirement plans like 401(k)s and Simplified Employee Pension (SEP) IRAs, NQDC plans are not protected under the Employee Retirement Income Security Act of 1974. This brings with it a trade-off: there are no limits to how much you can contribute to your plan but there is also no protection from a total loss. Therefore, it’s important to carefully evaluate the financial stability of your employer, as deferred amounts are typically subject to creditor claims.
#7: Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) provide triple tax benefits: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. HSA funds roll over each year, allowing for long-term growth.
After age 65, HSA funds can be used for any purpose, although non-medical withdrawals are subject to ordinary income tax. For 2025, individuals can contribute up to $4,300 to an HSA, or $8,550 for family coverage, with an additional $1,000 catch-up contribution for those 55 or older.
Other Timing & Income Management Tactics
Installment Sales
Selling assets with significant capital gains can create a hefty tax bill. With installment sales, you can spread the tax liability over multiple years by receiving payments over time rather than as a lump sum. This strategy helps manage your tax bracket and can potentially reduce your overall tax burden.
It’s particularly effective for large transactions, such as real estate or business sales, allowing you to maintain steady income while minimizing taxes.
Managing Gains & Losses in Your Investment Portfolios
Making major changes to your investment portfolio is not just about market timing but also personal timing. Years when you’re a high earner (and in a higher tax bracket) may not be the best years to sell off certain investments, even when the market’s up. That’s because the capital gains taxes, when paid at your higher tax bracket rate, might cost you more than it’s worth in the long-run.
Deferring some of your portfolio moves to your lower-tax-bracket years—and other portfolio management strategies like tax loss harvesting—can help you offset the pain of capital gains taxes. (What is tax loss harvesting? Find out here!)
Charitable Giving Strategies
Combining philanthropy with tax planning can be a win-win. Donor-advised funds and charitable remainder trusts provide immediate tax deductions while allowing you to control how and when funds are distributed to charities.
Charitable remainder trusts are especially valuable for highly appreciated assets, enabling you to defer capital gains taxes while generating income for yourself or your family before the remaining assets ultimately benefit your chosen causes.
Want to Learn More? Read our guide, How Do Charitable Donations Affect Taxes? |
Building & Maintaining Your Tax Deferral Strategy
As you’ve probably figured out by now, tax deferral strategies can be complex, and there’s no one-size-fits-all solution. Your strategy will also need be ever-evolving as your goals and needs change—and as tax laws change. (Yes, you also need to regularly monitor tax laws! A single change in tax law could send your tax deferral strategy—and many Americans’ strategies—into the ground.)
If you don’t have a financial advisor, talking to one is often the best place to start. At Advent Partners, we make sure your tax deferral plan is just one part of a larger comprehensive financial plan designed to cover every aspect of your financial wellness, so that you’re more financially prepared, protected, and purposeful. Schedule a time to meet with us today if you’d like to learn more.
*Hypothetical example is for illustrative purposes. May not be representative of actual results.
DISCLAIMER
Thrivent Advisor Network and its advisory persons do not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
The concepts in this article are intended for educational purposes only. They may not be suitable for your particular situation. The suitability of any specific product or strategy will be dependent upon your particular situation. You should consult with your attorney, tax advisor or accountant before implementing any strategy covered in this article.
