What is a tax-deferred account?

A tax-deferred account is one that allows individuals to postpone paying taxes on money until they withdraw it, typically during retirement. In this type of account, investments have the potential to grow without being subject to taxes throughout the accumulation phase. This feature can significantly enhance the growth of the investment since the money that would have been paid in taxes can instead remain invested, potentially compounding over time.

When funds are finally taken out of a tax-deferred account, such as a traditional IRA or a 401(k), they are then taxed as ordinary income at that time. This tax treatment is beneficial for many individuals, as they may be in a lower tax bracket during retirement than they were during their working years.

Other options reflect misunderstandings about tax-deferred accounts. Some accounts may be tax-free or subject to immediate taxation, but the fundamental characteristic that defines a tax-deferred account is the postponement of taxes until the withdrawal phase. Hence, the definition in option C captures the essence of what a tax-deferred account entails.