Federal Income Tax Deferral: Accounts, Limits, and RMDs

Federal income tax deferral lets you postpone the tax on certain income until a later year, when you may be in a lower bracket or in a better position to pay. It is not forgiveness. The liability stays on the books and comes due when you withdraw the money, sell the asset, or hit a statutory deadline. The main options available to individuals are retirement accounts, real estate like-kind exchanges, Qualified Opportunity Fund investments, installment sales, savings bonds, and nonqualified deferred compensation plans.

What Deferral Actually Does

The default federal rule is that income is taxed the year you receive it or have an unrestricted right to it. Deferral opens a legal gap between earning the money and the IRS counting it, and that gap exists only because a specific section of the Internal Revenue Code authorizes it.

The doctrine underneath the default is constructive receipt. Under Treasury regulations, income counts as received once it has been credited to your account or set aside so you could draw on it, even if you have not touched it. The exception is when your control over the money is subject to substantial limitations or restrictions.¹ Every deferral option below works by creating that kind of restriction, whether through a retirement plan’s withdrawal rules, an exchange timeline, or a payout schedule.

Retirement Accounts

Employer-sponsored retirement plans are the most common deferral tool. When you contribute to a traditional 401(k) or 403(b), the money is subtracted from your paycheck before income tax is calculated. Your W-2 shows lower taxable wages, and the funds grow without annual tax on gains. You pay income tax when you take distributions in retirement.

2026 Limits for 401(k) and 403(b) Plans

For 2026, the annual elective deferral limit for 401(k), 403(b), and governmental 457 plans is $24,500. If you’re 50 or older, you can add an $8,000 catch-up. Workers aged 60 through 63 get an enhanced catch-up of $11,250 instead of $8,000, a rule added by SECURE 2.0.²

One rule catches people off guard in 2026. If you earned more than $150,000 in FICA wages from your employer in 2025, your catch-up contributions must go into a Roth account rather than a traditional pre-tax account. The extra contribution room is still there, but the upfront deferral disappears because Roth contributions are made with after-tax dollars. The tradeoff is that qualified Roth withdrawals later are entirely tax-free.

Traditional IRAs

Individual Retirement Accounts under Section 408 of the Internal Revenue Code work the same way at the individual level: contribute now, pay tax at withdrawal.³ For 2026, the limit is $7,500, or $8,600 if you’re 50 or older.⁴

Whether the contribution is actually deductible depends on your income and whether you’re covered by an employer plan. For 2026, the deduction phases out starting at $81,000 of modified adjusted gross income for single filers and $129,000 for married couples filing jointly, when at least one spouse participates in a workplace plan.⁵ Above the phaseout, you can still contribute, but you lose the upfront deduction. Funds inside the account continue to grow tax-deferred either way. Withdrawals are taxed as ordinary income at the rates in effect that year.

Real Estate and Capital Gains

Like-Kind Exchanges Under Section 1031

Section 1031 lets you swap one piece of investment or business real estate for another without recognizing the gain at the time of the exchange.⁶ The deferred gain rolls into the replacement property’s basis, so the tax comes due when you eventually cash out. Since the Tax Cuts and Jobs Act of 2017, only real property qualifies. Personal property, vehicles, and equipment no longer do.

The timelines are strict. You have 45 days from selling the relinquished property to identify a replacement in writing, and 180 days (or your return due date including extensions, whichever comes first) to close. Miss either window and the entire gain becomes taxable in the year of the original sale.

Receiving cash or non-like-kind property, known as “boot,” triggers partial recognition. Debt relief counts as boot too: if the mortgage on your replacement property is smaller than the one on the property you gave up, the difference is taxable. This is where many exchanges stumble.

Qualified Opportunity Zone Investments

Section 1400Z-2 lets you defer capital gains by reinvesting the proceeds into a Qualified Opportunity Fund within 180 days of the sale that produced the gain.⁷ The step-up benefits for long-term holders required investments made by the end of 2019 or 2021 and are no longer available to new investors.

If you currently hold a Qualified Opportunity Fund investment, mark the date: all deferred gains under the original program must be recognized no later than December 31, 2026, unless an earlier triggering event (such as selling your fund interest) happens first.⁸ The recognized amount is the lesser of your original deferred gain or the fair market value of your fund interest on that date. Depending on your estimated tax picture, payments may be due as early as January 15, 2027.

Installment Sales Under Section 453

Sell property and receive at least one payment after the close of the tax year, and the installment method spreads the gain across the years you actually collect, rather than dropping it all into one return.⁹ Installment treatment applies automatically unless you elect out. A gross profit ratio (total expected profit divided by total contract price) determines the taxable share of each payment.

The method is unavailable for sales of inventory, dealer dispositions, and publicly traded stocks and securities. It works best for sales of real estate, private businesses, and other large assets paid over time.

Savings Bonds

Series EE and Series I savings bonds carry a built-in deferral. By default, you owe no federal income tax on the accruing interest until you redeem the bond, it reaches final maturity, or you otherwise dispose of it.¹⁰ Series EE bonds stop earning interest at 30 years, and all accumulated interest becomes taxable at that point whether you cash them in or not.

You can elect instead to report interest annually as it accrues, which can make sense for bonds held in a child’s name at a low or zero tax rate. Once you make the election, it covers all your savings bonds going forward, and you must report all previously unreported accrued interest in the first year.¹¹ Savings bond interest is always exempt from state and local income tax, and may be excluded from federal tax entirely if used for qualified higher education expenses, subject to income limits.

Nonqualified Deferred Compensation

Outside the world of 401(k)s and IRAs, executives and other highly compensated employees sometimes defer salary or bonuses through nonqualified deferred compensation plans. Section 409A governs these arrangements and imposes rigid timing. The election to defer generally has to be made before the start of the year you’ll earn the compensation.¹² You cannot wait to see how the year plays out and decide retroactively.

The penalties for a 409A failure are severe and fall on the employee. If the plan does not meet the statute’s requirements, the entire deferred amount becomes immediately taxable, and the employee also owes a 20% additional tax plus interest at the IRS underpayment rate plus one percentage point, running from the year the compensation was first deferred.¹³

What It Costs to Pull Money Out Early

Retirement account deferral is a trade with the government. You get to postpone taxes, but the money is meant to stay put until retirement age. Breaking that early triggers a 10% additional tax on top of the ordinary income tax on the distribution.¹⁴ On a $50,000 early withdrawal in the 22% bracket, that’s an extra $5,000.

Section 72(t) carves out exceptions. The 10% penalty does not apply to:

Distributions after age 59½
Distributions to a beneficiary after the account holder’s death, or to the holder after becoming totally and permanently disabled
Substantially equal periodic payments based on your life expectancy, which once started must continue for at least five years or until age 59½, whichever is longer
Withdrawals from a former employer’s plan if you separated from service at age 55 or later
Qualified birth or adoption expenses, up to $5,000 per child
Qualified disaster recovery distributions
Domestic abuse distributions, up to the lesser of $10,000 or 50% of your vested balance
Terminal illness distributions after a physician’s certification

An exception removes the 10% penalty only. The withdrawn amount still counts as ordinary income for the year.

When Deferral Ends: Required Minimum Distributions

Deferral in a traditional retirement account does not last forever. Starting at age 73, you must begin taking required minimum distributions from traditional IRAs, 401(k)s, and most other tax-deferred retirement accounts.¹⁵ Your first RMD is due by April 1 of the year after you turn 73. Every RMD after that is due by December 31. Delaying the first RMD to April means taking two distributions in one calendar year, which can push you into a higher bracket.

Missing an RMD carries a 25% excise tax on the shortfall between what you should have withdrawn and what you actually took. The rate drops to 10% if you correct the mistake within a two-year window by taking the missed distribution and filing an updated return.¹⁶ Before SECURE 2.0, the excise tax was 50%.

How to Report Deferred Income

Employer-sponsored plan deferrals largely report themselves. Your employer reduces your taxable wages on your W-2, and Box 12 shows the elective deferral using specific letter codes. When you later take a distribution, the payer sends a Form 1099-R with the taxable amount in Box 2a, which flows onto your Form 1040 as ordinary income.¹⁷ The numbers need to match; mismatches are a common trigger for IRS notices.

A 1031 exchange goes on Form 8824, with descriptions of both properties, the dates of identification and transfer, and a gain calculation showing your adjusted basis, exchange expenses, any boot, realized gain, and the recognized versus deferred portions.¹⁸

Opportunity Zone deferrals are reported on Form 8949. Enter the fund’s employer identification number in column (a), the date of your investment in column (b), and Code Z in column (f) with the deferred gain as a negative number in column (g); the subtotals carry to Schedule D.¹⁹ For 2026, investors who still hold deferred gains will report the recognized gain on the same form without the deferral adjustment.

Installment sales go on Form 6252, which needs the selling price, adjusted basis, and selling expenses to work out the gross profit percentage applied to each year’s payments.

Savings bonds require nothing until redemption if you use the default deferral. At redemption, you’ll receive a Form 1099-INT showing all the interest the bond earned over its lifetime.¹⁰ If you previously elected to report interest annually, keep records of what you already reported so you don’t count the same interest twice; Publication 550 explains the adjustment.¹¹

1
eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income
2
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
3
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
4
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
5
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
6
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
7
Office of the Law Revision Counsel. 26 USC 1400Z-2 – Special Rules for Capital Gains Invested in Opportunity Zones
8
Internal Revenue Service. Opportunity Zones Frequently Asked Questions
9
Office of the Law Revision Counsel. 26 USC 453 – Installment Method
10
TreasuryDirect. Tax Information for EE and I Bonds
11
Internal Revenue Service. Publication 550 – Investment Income and Expenses
12
eCFR. 26 CFR 1.409A-2 – Deferral Elections
13
Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
14
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
15
Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements
16
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
17
Internal Revenue Service. Instructions for Forms 1099-R and 5498
18
Internal Revenue Service. Instructions for Form 8824
19
Internal Revenue Service. Instructions for Form 8949