McMillion Financial Group
your partner in retirement planning
your partner in retirement planning
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The Power of Tax-Deferred Compounding
In this hypothetical illustration, we'll analyze the scenario for a monthly contribution of $250 into a
$403(b) plan that is earning 8% APR versus the same monthly contribution and earnings rate in a
taxable investment with a 25% tax rate.
This hypothetical example is not intended to illustrate the performance of an actual investment.
This illustration is not an indication or guarantee of future performance. The illustration is a
hypothetical analysis that is calculated using a single compounded rate of return, which is highly
unlikely as rates will vary over time, particularly for long-term investment fees or expenses, which
would lower performance.
A taxpayer saving in a taxable investment would first have to pay tax on the $250 earmarked for
saving, netting only $187.50 for deposit each month. In 10 years, the taxable investment would
have grown to $30,970 while the 403(b) investment would be at $34,531, net after taxes--a
difference of $3,561.
The difference is that in the taxable investment, taxes were paid on all of the gains thus reducing
the amount saved. With the 403(b) plan, the entire investment was permitted to grow tax-deferred.
Over a period of 30 years, the difference is even more dramatic. Here the taxable investment
grows to just $191,250 while the tax-deferred investment grows to $281,306 net after taxes. The
difference is a shopping $90,055!
All the funds that were paid out from the taxable investment to cover the taxes were allowed to
remain in the tax-deferred 403(b) investment to compound over all those years. With a 403(b)
account, those funds were working for the investor throughout that entire period of time. And
while 403(b) assets are subject to taxes upon withdrawal, investors often find themselves in a
lower tax bracket at retirement than when they were working. This means the amount paid in
taxes should be less.
In this hypothetical illustration, we'll analyze the scenario for a monthly contribution of $250 into a
$403(b) plan that is earning 8% APR versus the same monthly contribution and earnings rate in a
taxable investment with a 25% tax rate.
This hypothetical example is not intended to illustrate the performance of an actual investment.
This illustration is not an indication or guarantee of future performance. The illustration is a
hypothetical analysis that is calculated using a single compounded rate of return, which is highly
unlikely as rates will vary over time, particularly for long-term investment fees or expenses, which
would lower performance.
A taxpayer saving in a taxable investment would first have to pay tax on the $250 earmarked for
saving, netting only $187.50 for deposit each month. In 10 years, the taxable investment would
have grown to $30,970 while the 403(b) investment would be at $34,531, net after taxes--a
difference of $3,561.
The difference is that in the taxable investment, taxes were paid on all of the gains thus reducing
the amount saved. With the 403(b) plan, the entire investment was permitted to grow tax-deferred.
Over a period of 30 years, the difference is even more dramatic. Here the taxable investment
grows to just $191,250 while the tax-deferred investment grows to $281,306 net after taxes. The
difference is a shopping $90,055!
All the funds that were paid out from the taxable investment to cover the taxes were allowed to
remain in the tax-deferred 403(b) investment to compound over all those years. With a 403(b)
account, those funds were working for the investor throughout that entire period of time. And
while 403(b) assets are subject to taxes upon withdrawal, investors often find themselves in a
lower tax bracket at retirement than when they were working. This means the amount paid in
taxes should be less.
Securities offered through NEXT Financial Group, Inc. member FINRA and SIPC 2500 Wilcrest, Suite 620,
Houston TX 77042 (877) 876-6398, www.nextfinancial.com
Before investing in a mutual fund or variable annuity, consider its investment objectives, risks, charges and
expenses carefully.
_______________________________________________________________________________
Copyright 2008 McMillion Financial Group LLC. All rights reserved. Revised May 5, 2008.
______________________________________________________________________________
Houston TX 77042 (877) 876-6398, www.nextfinancial.com
Before investing in a mutual fund or variable annuity, consider its investment objectives, risks, charges and
expenses carefully.
_______________________________________________________________________________
Copyright 2008 McMillion Financial Group LLC. All rights reserved. Revised May 5, 2008.
______________________________________________________________________________
Branch Office: 3022 S National Avenue, Suite 326, Springfield MO 65804
Phone (417) 889-9003 E-mail: kmcmillion@mcmillionfinancialgroup.com
McMillion Financial Group LLC is not an affiliate of Next Financial Group LLC.
Phone (417) 889-9003 E-mail: kmcmillion@mcmillionfinancialgroup.com
McMillion Financial Group LLC is not an affiliate of Next Financial Group LLC.
