We’ve all heard about the benefits of tax-deferred earnings growth. This hypothetical example spells it out clearly: Tax-deferred earnings growth is like getting free money.
This graph shows a comparison of money invested in a taxable account [point to yellow line] and the same amount of money invested in a tax-deferred account [point to red line]. By the end of the 18-year period, the tax-deferred account has a 56% premium over the taxable account -- that’s pretty hard to beat!
The example assumes an 8% annual rate of return. The tax-deferred account assumes that both state and federal taxes are deferred. The accumulated amount in the tax-deferred account will be subject to taxation upon withdrawal. The taxable account assumes a combined tax rate of 33%. This example is meant to show you the power of tax-deferred compounding, and is not meant to represent the return of any specific investment.
