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Tax-deferred Compounding

Tax-deferred compounding: you don't pay taxes on your savings or investment earnings while you are saving.

  • All the money you contribute to your savings plan continues to grow without being taxed until it is withdrawn.
  • You pay lower current taxes on a lower gross income because your contribution comes out of your paycheck before it is taxed. At the same time, you are not only saving tax dollars, but those dollars are being invested.
  • Although you will pay taxes on the money you eventually withdraw from your savings plan, you'll only pay taxes on the amounts as they are withdrawn. Good financial planning and tax advice can help you minimize the tax bite while you continue to earn profits on your nest egg.

Start early and watch your savings grow!
 

If you save $100 per month ($1200 per year), tax-deferred, earning 8% for 10 years, you would accumulate $18,417. That same $100, after-tax (27% tax bracket), would mean saving only $73 per month and your 8% earnings would also be taxed, reducing them to only 5.84%. The result is that your taxable savings over 10 years would accumulate to only $11,918, tax deferral allows you to save more, and the more you save the faster it can grow. Tax-deferred savings will be taxed upon withdrawal.

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