Taxable vs. Tax Deferred vs. Tax Free Investment

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.

MSG_RESULT

MSG_RESULT_DETAIL Please see the information below for additional details specific to these results. **GRAPH**
Results Summary
  ACCOUNT_TYPE1 ACCOUNT_TYPE2 ACCOUNT_TYPE3
New contributions
(over a period of CONTRIB_YEARS)
CONTRIB_AMOUNT1
CONTRIB_FREQUENCY
CONTRIB_AMOUNT2
CONTRIB_FREQUENCY*
CONTRIB_AMOUNT3
CONTRIB_FREQUENCY
Balance when withdrawals begin
WITHDRAW_STARTING_BALANCE1 WITHDRAW_STARTING_BALANCE2 WITHDRAW_STARTING_BALANCE3
After tax withdrawal
(over a period of WITHDRAW_YEARS)
WITHDRAW_AMOUNT1
WITHDRAW_FREQUENCY1
WITHDRAW_AMOUNT2
WITHDRAW_FREQUENCY2
WITHDRAW_AMOUNT3
WITHDRAW_FREQUENCY3
Total withdrawals, after taxes
WITHDRAW_TOTAL_WITHDRAWALS1 WITHDRAW_TOTAL_WITHDRAWALS2 WITHDRAW_TOTAL_WITHDRAWALS3

*In this scenario contributions to the tax-deferred investment are tax deductible when they are made. The calculator has increased 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.

Input Summary
Existing balance CONTRIB_STARTING_BALANCE
Annual rate of return CONTRIB_ANNUAL_ROR
Years to contribute CONTRIB_YEARS
Years of withdrawals WITHDRAW_YEARS
Tax rate during contribution period* CONTRIB_TAX_RATE
Tax rate during withdrawal period* WITHDRAW_TAX_RATE

*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.

Withdrawals prior to age 59-1/2 on qualified accounts may be subject to a 10% Federal penalty.

**GRAPH**

Balances by Year

**REPEATING GROUP**

Taxable vs. Tax Deferred vs. Tax Free Investment 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 types of investments you select. The S&P 500® for the 10 years ending Dec. 31st, 2013 had an annual compounded rate of return of 7.3%, including reinvestment of dividends. From January 1970 through the end of 2013, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.6% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 0.25% 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.

Years to contribute
Number of years you plan on making contributions.
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.
Existing balance
Any existing balance for the accounts.
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.
Withdrawal frequency
The frequency of your distributions. The options are Monthly, Quarterly or Annually. All distributions are assumed to be taken at the end of the period.
Tax during contributions / withdrawals*
Your estimated marginal tax rate. Use the table below to assist you in estimating your Federal 2014 tax rate.
Filing Status and Income Tax Rates 2014*
Tax RateMarried Filing Jointly or Qualified Widow(er)SingleHead of HouseholdMarried Filing Separately
10%$0 - $18,150$0 - $9,075$0 - $12,950$0 - $9,075
15%$18,150 - $73,800$9,075 - $36,900$12,950 - $49,400$9,075 - $36,900
25%$73,800 - $148,850$36,900 - $89,350$49,400 - $127,550$36,900 - $74,425
28%$148,850 - $226,850$89,350 - $186,350$127,550 - $206,600$74,425 - $113,425
33%$226,850 - $405,100$186,350 - $405,100$206,600 - $405,100$113,425 - $202,550
35%$405,100 - $457,600$405,100 - $406,750$405,100 - $432,200$202,550 - $228,800
39.6%over $457,600over $406,750over $432,200over $228,800
*Caution: Do not use these tax rate schedules to figure 2013 taxes. Use only to figure 2014 estimates. Source: 2014 tax brackets http://www.irs.gov
*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.
Increase tax-deferred contribution by tax deduction savings
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.


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