Taxable vs. Tax Advantaged Investments

How taxes are applied to an investment can make an incredible difference. This calculator is designed to help compare a normal taxable investment to two common tax advantaged situations: An investment where taxes are deferred until withdrawals are made, and an investment where taxes are paid on money that goes into the account, but all withdrawals are tax free.

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Definitions

Annual rate of return
This is the annual rate of return you expect from your investments after taxes. The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month return was -39%, which happened twice, once from September 1973 to September 1974 and again from November 2007 to November 2008. Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

Existing balance
Any existing balance for the accounts.
Compensate for tax-deduction
If you check this box the calculator will assume contributions to the tax-deferred investment are tax-deductible when they are made. The calculator will then increase the contribution amount for the tax-deferred investment by the amount required to make the net contribution equal to the investments that have contributions made on an after tax basis.
Years to contribute
Number of years you plan on making contributions.
New contributions
Your periodic contribution. All contributions are assumed to happen at the beginning of the period.
Contribution frequency
The frequency of your contributions. The options are Monthly, Quarterly, or Annually. All contributions are assumed to be made at the beginning of the period.
Years of withdraws
Number of years you plan on taking distributions. Enter "1" for a lump sum distribution. All distributions are assumed to happen at the beginning of the period.
Withdrawal frequency
The frequency of your distributions. The options are Monthly, Quarterly or Annually. All distributions are assumed to be taken at the beginning of the period.
Tax during contributions / withdrawals*
Your estimated marginal tax rate. You can use the table below to assist you in determining your current tax rate.
Filing Status and Income Tax Rates 2009
Tax rate Married filing jointly
or Qualified Widow(er)
Single Head of household Married filing separately
10% $0 - 16,700 $0 - 8,350 $0 - $11,950 $0 - 8,350
15% $16,701- 67,900 $8,351- 33,950 $11,951- 45,500 $8,351- 33,950
25% $67,901- 137,050 $33,951- 82,250 $45,501- 117,450 $33,951- 68,525
28% $137,051- 208,850 $82,251- 171,550 $117,451- 190,200 $68,526- 104,425
33% $208,851- 372,950 $171,551- 372,950 $190,200- 372,950 $104,425- 186,475
35% over $372,950 over $372,950 over $372,950 over $186,475
Source: http://www.irs.gov/pub/irs-drop/rp-08-66.pdf

*Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the hypothetical investments shown. Investors should consider their personal investment horizon and income tax bracket, both current and anticipated, when making an investment decision, as these may further impact the comparison.