“The tax-deferred accounts with which Americans are most familiar are 401(k)s and Individual Retirement Accounts (more commonly known as IRAs). Other tax-deferred accounts, such as 403(b)s, 457s, SIMPLES, SEPs, and Keoghs, have different rules that apply to them, but they all generally have two things in common: Contributions are tax-deductible. Generally, when you put money into this bucket, you get a tax deduction. For example, if you make $100,000 this year, and you put $10,000 into your 401(k), your new taxable income is $90,000. Distributions are treated as ordinary income. When you divert a portion of your income to a tax-deferred investment, all you’re really doing is postponing the receipt of that income until a point in time much further down the road. When you take the money out, you pay taxes at whatever the rate happens to be in the year you make the distribution. For that reason, the IRS calls these distributions ordinary income and taxes them accordingly.”