In a tax-deferred account, funds can grow more over time compared to an account subject to current income taxation for a few reasons:
1. Funds in a tax-deferred account can accumulate more over time because the taxes on gains are postponed until withdrawal. This means that the money that would have been used to pay taxes in a currently taxed account can remain invested in the tax-deferred account, allowing it to earn additional interest.
2. Withdrawals of gains from tax-deferred accounts may be taxed at more favorable capital gains rates, which can result in higher net returns compared to a currently taxed account where gains are subject to ordinary income tax rates.
3. Tax-deferred accounts may offer the benefit of compounding interest on both the initial investment and any accrued interest, leading to a snowball effect where earnings generate more earnings over time, further boosting the growth of funds within the account.