Tax Deferred Accounts... A Powerful Asset You Cannot Ignore!Submitted by William Allan Financial Services, LLC on April 7th, 2017
The following variables apply to the chart (for both accounts): Annual Contribution: $10,000 Annual Investment Performance: 9.0% Number of Years Invested: 25
For the Tax-Deferred Account there are ZERO tax implications!
For the Non Tax-Deferred Account there are two main tax drags on this account: 1) Assuming a 20% income tax rate, this account loses $2,000 annually by having to pay that tax. 2) Also, this being a taxable account, you will be subject to capital gains taxes. We assumed this tax rate to be 15% and 15% of your performance would result in capital gains (i.e., realized).
Needless to say, with money coming out of this account it woefully underperforms the tax-deferred account. When incorporating the tax savings on the annual contributions and the benefit of not paying taxes throughout the life of this account (until withdrawals), the Tax-Deferred Account grows an extra $361,000 and some change! That is some real money!
Now imagine if you contributed the maximum amount of $18,000 to a 401(k)? Or, you are self-employed and can contribute up to $53,000 to a solo 401(k)? Yes, the amount of tax savings are staggering! Worth it to make the effort to contribute!