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tax-deferred growth example

See the potential: a hypothetical situation

 

This chart demonstrates how powerful tax deferral can be when it compounds over time. Here’s how it works:

  • A single tax-deferred investment earns 8% gross annual interest over 30 years
    • After 30 years, the single investment has grown to more than $750,000
    • When the lump sum is withdrawn, 28% taxes are paid, which means the amount received is more than $560,000
  • With a single taxable investment, 28% taxes are paid every year
    • So over the same 30 years, the amount received is approximately $400,000
  • Therefore, the tax-deferred investment earned approximately $160,000 more than the taxable investment

Keep in mind, actual results will vary. Real-life scenarios would need to take factors like insurance expenses, annual policy fees or investment option expenses into account. Lower tax rates on capital gains and dividends could make the taxable investment returns more favorable, which would lessen the difference.

Before making an investment, consider your personal investment horizon and income tax rate, both current and anticipated. Changes in tax rates and tax treatment of investment earnings may further impact the results of this comparison.

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