Taxable vs. Tax Deferred Investment Growth Calculator (2024)

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Taxable Vs. Tax-Deferred Investment Growth

The difference between taxable vs. tax-deferred investment growth can be substantial, but it can also be difficult to quantify without a calculator.

The mathematical reality is tax deferral will help you achieve your retirement goals more quickly, but there is a price to pay in terms of government regulation and sometimes higher fees associated with tax-deferred investing.

You must weigh the growth benefits of tax-deferred investing against these costs to decide the best tax structure for achieving your financial goals.

Fortunately, this Taxable vs. Tax-Deferred Calculator makes the math easy so you can quickly find the right answer.

Below is analysis of each investment choice to help you make the decision…

Taxable Investments

Earned income is taxable every year, but exceptions exist.Taxable investment income includes:

Tax-Deferred Investments

Most tax-deferred investments reside in retirement accounts. Tax-deferred investments only pay taxes when investments are liquidated or sold.

Some equity investments, like stocks, can be considered tax-deferred investments. Although you may pay taxes on dividends, you will not pay taxes on market gains until sold.

Traditional retirement accounts are tax-deferred.Some government savings bonds also allow you to pay taxes on interest earned or defer tax payments until the bonds mature.

Related: A better investment strategy than buy and hold

Taxable Investment Advantages

Surprisingly, there are advantages to taxable investments that must be considered when formulating your investment plan:

Invest more – There is no limitation to the amount you can invest in taxable investments; whereas, retirement plans have limits on annual contributions.
Withdraw anytime – You don't need to worry about penalties when withdrawing money from taxable investments (except in rare instances like certificates of deposit). Retirement accounts are subject to various penalties for premature distributions.

Remember: Retirement accounts have additional regulations – consult a financial expert.

Deferred-Tax Investment Advantages

Tax-deferred investing delays income taxes on investments until you withdraw money resulting in the following advantages:

Grow quickly – The money you would have paid to the tax man stays in the account and continues to work for you earning additional return. More principal means more money to grow.
Less immediately taxable income – Easier on your pocketbook and current financial situation.

Always remember that the value of your tax deferral is determined by your tax bracket.

Similarly, if you believe you might fall into a higher tax bracket later then it might make sense to pay the the taxes now rather than defer them to a higher tax bracket later.

Before deciding, compare investment options using the Taxable vs. Tax-Deferred Investment Growth Calculator. It will tell you which strategy provides the best future value?

Bottom Line

Whichever account you choose, rememberthat you will still be paying taxes. Don't put off taxes simply because you prefer to live lavishly now. Likewise, don't pay taxes now in the midst of a dire financial situation. Make your decision using math – not emotion.

Regardless of the tax implications you should make sure to maximizecontributions now to secure your retirement later.

Related: How to take back control of your portfolio

Contribute early and often so you can watch your savings grow!

Taxable Vs. Deferred Tax Savings Terms & Definitions

Taxable – Savings contributions taxed prior to deposit so only the net amount is invested.
Tax-deferred – Savings contributions taxed upon withdrawal from an investment.
Amount invested– Total contributions to your investment accounts.
Expected annual rate of return– Yearly percentage growth you expect from your investments.
Number of years invested – How long your contributions remained invested.
Marginal tax rate – The tax rate paid applied to your next dollar of income (as opposed to the effective tax rate which is total taxes divided by total income).
Investment return that is taxable – The percentage rate of expected return from investment that is taxable.
Future value – The value of your investment in nominal dollars after the number of years invested.
Annualized yield – The rate of return calculated as an annual rate.

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Taxable vs. Tax Deferred Investment Growth Calculator (2024)

FAQs

What is the difference between tax-deferred growth and taxable growth? ›

In the taxable scenario, taxes are applied annually while in the tax-deferred scenario, the investment is not taxed until the money is withdrawn. In the tax-free scenario, the money is an investment that is not subject to Federal or State tax.

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Is tax-deferred growth good? ›

Some of the best retirement plans, including traditional IRAs and traditional 401(k)s, are tax-deferred. These accounts are considered an ideal place to park long-term investments, since you can escape paying taxes on realized gains for decades.

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How do you calculate tax-deferred? ›

Calculation of Deferred Tax

There are no strict rules for deferred tax calculation as it is merely the difference between gross profit in a Profit & Loss Account and a tax statement.

Do most retirement plans grow tax-deferred? ›

The first, and most common, is an employer-sponsored retirement plan where contributions are made before tax, or pretax, usually taken out of your paycheck before taxes and directly invested in your employee retirement plan. These contributions grow tax free but are taxable upon distribution.

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What are the disadvantages of tax-deferred? ›

The drawbacks of tax-deferred retirement plans are limited access to funds, minimal investment options, and additional taxation upon the death of of a contributor.

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Which is better, tax-free or tax-deferred? ›

Key Takeaways. Tax-deferred account contributions lower taxable income, meaning you'll pay taxes at a later time. Tax-exempt account withdrawals are tax-free, meaning you'll pay taxes up front.

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What are 2 advantages to having a tax-deferred investment account? ›

What is the purpose of a tax-deferred retirement account?

Lower your tax bill right now.
Raise the potential for compounding.
Save on taxes over the long term.
Eliminate current taxes on investment gains.
Support your savings discipline.

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What is the advantage of a tax-deferred exchange to a real estate investor? ›

The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

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Do stocks grow tax-deferred? ›

Dividends and capital gains on stock held inside a traditional IRA are tax-deferred, and tax-free if you have a Roth IRA. Dividends and capital gains on stocks in a regular brokerage account typically aren't.

How to calculate deferred tax example? ›

Example of Deferred Tax Asset and Liability

If bad debts were not disallowed, entity would have paid tax on Rs. 1000 amounting Rs 200 i.e 1000*20%. For the additional Rs. 40 which is already paid now, we have to create DTA. Entry for recording the DTA is as under: Deferred Tax Asset Dr 40.

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What is the tax-deferred rule? ›

Tax-deferred status refers to investment earnings, such as interest, dividends, or capital gains, that accumulate tax-free until the investor takes constructive receipt of the profits. The tax savings can be substantial when investments are held until retirement.

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Why do we calculate deferred tax? ›

Deferred tax liability is created when a tax obligation is accumulated in one financial year but is due in the subsequent years. A deferred tax liability arises due to the difference in timing between when the tax was accrued and when it is due to be paid.

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What is the $1000 a month rule for retirement? ›

According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.

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How much money do you need to retire with $100,000 a year income? ›

For example, let's say your pre-retirement annual income is $100,000 and you believe you'll need 80% of this to live your desired retirement lifestyle, or $80,000. In this case you would need total retirement savings of $2 million ($80,000/.

What is a balanced portfolio for a 65 year old? ›

In your later years, a conservative allocation of 30% cash, 20% bonds and 50% stocks might be appropriate. Diversified portfolios typically include a core of at least 50% stocks in part because equities alone offer the potential to generate long-term returns exceeding inflation.

What is the difference between taxable and tax-deferred accounts? ›

Taxable accounts. Earnings are subject to tax annually in the year paid. Tax-deferred accounts. Earnings grow tax-free until you withdraw those earnings at a later date.

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What does it mean when your money grows tax-deferred? ›

Tax-deferred means you don't pay taxes until you withdraw your funds, instead of paying them upfront when you make contributions. With tax-deferred accounts, your contributions are typically deductible now, and you'll only pay applicable taxes on the money you withdraw in retirement.

What is tax-deferred growth phase? ›

Tax-deferred growth refers to the ability of gains in an investment vehicle, such as a brokerage account or a real estate property, to compound without being disrupted by tax payments. You pay taxes later than you would in a taxable account.

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What is the difference between current tax and deferred tax? ›

What Is the Difference Between Current Tax and Deferred Tax? Current tax is tax payable, while deferred tax is intended to be paid in the future.

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