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 types of investments you select. The S&P 500 for the 10 years ending Dec. 31st, 2012 had an annual compounded rate of return of 7.1%, including reinvestment of dividends. From January 1970 through the end of 2012, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.1% (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*
Filing Status and Income Tax Rates 2013*
Caution: Do not use these tax rate schedules to figure 2012 taxes. Use only to figure 2013 estimates.
Tax rate Married filing jointly
or qualified widow(er)
Single Head of household Married filing separately
10% $0 - $17,850 $0 - $8,925 $0 - $12,750 $0 - $8,925
15% $17,850 - $72,500 $8,925 - $36,250 $12,750 - $48,600 $8,925 - $36,250
25% $72,500 - $146,400 $36,250 - $87,850 $48,600 - $125,450 $36,250 to $73,200
28% $146,400 - $223,050 $87,850 - $183,250 $125,450 - $203,150 $73,200 to $111,525
33% $223,050 - $398,350 $183,250 - $398,350 $203,150 - $398,350 $111,525 to $199,175
35% $398,350 - $450,000 $398,350 - $400,000 $398,350 - $425,000 $199,175 to $225,000
39.6% over $450,000 over $400,000 over $425,000 over $225,000
Source: 2013 preliminary tax brackets subject to correction 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.

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.