Market View: The Benefits of Tax-Deferred Compounding

Here’s an eye-popping reminder of the value of tax-deferred compounding. The first bar shows the growth of $250 monthly deposits into a taxable account earning seven percent a year, with 25 percent of the earnings going to taxes each year. The second shows the growth of the same investments (and earnings) inside a tax-deferred retirement account. The third bar shows that you come out way ahead even if you cash out the account as a lump sum after 40 years and pay 25 percent of the total in taxes. And the account can grow even more if you spread withdrawals throughout retirement.

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This illustration was compiled using information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing. The performance data quoted represents past performance. Past performance is no guarantee of future results.