The Benefits of Tax-Deferred Compounding

*This hypothetical example is for illustrative purposes only and is not meant to represent the return of any specific investment. Your investment in Scholars Choice may perform better or worse than this example. The example assumes a one-time lump sum investment of $10,000 and an 8% annual rate of return. The tax-deferred account assumes tax-deferred growth at both the federal and state levels. The accumulated amount in the tax-deferred account will be subject to taxation upon withdrawal. The taxable account assumes a tax rate of 33%.

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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.