What benefit does a tax-deferred investment provide?

A tax-deferred investment allows investors to postpone paying taxes on investment gains until they withdraw funds, typically during retirement. This is advantageous because it enables the investment to grow without the immediate burden of taxation. As a result, the full amount of the investment can compound over time, potentially increasing returns.

When taxes are paid only upon distribution, investors can capitalize on the growth potential of their investments in the interim, which can lead to a more substantial accumulation of wealth compared to taxable investments where taxes must be paid annually on gains. This strategy can also provide some tax planning advantages, as individuals may find themselves in a lower tax bracket when they eventually withdraw funds during retirement.

The incorrect options highlight different misconceptions about tax-deferred investments. For instance, stating that taxes are paid immediately on all gains does not accurately capture the essence of tax deferral. Additionally, claiming that it guarantees a tax-free return is misleading because, while taxes may be deferred, they are eventually due upon distribution. Finally, the notion that it allows for greater upfront contributions is not typically a defining feature of tax-deferred accounts; instead, contribution limits may still apply.

Overall, the benefit of postponing tax payments until distribution uniquely enhances the growth potential of investments, making option B the