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3 min read

The Power Of Tax Deferral

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Today I wanted to talk about a concept specific to the placement of your investment accounts. By placement, I mean whether you own your investments inside of a tax-deferred investment account such as an IRA or 401(k), the Self-Directed account types offered by Rocket Dollar, and/or a taxable brokerage account. Placing your retirement dollars in a tax-deferred account allows your earnings grow tax-free.

Let’s take two individuals on the Rocket Dollar team (just for the fun of it): Ryan, one of our engineers, invests $100,000 earning 7% consistently year over year, for 20 years, versus Tiva, another engineer for Rocket Dollar, who also invests $100,000 and earns 7% consistently over 20 years, too. The difference is Tiva has a tax-deferred account and will actually have a $136,874 increase in value over Ryan, who owns the investment in a taxable brokerage account.

Even if Tiva were to withdraw that money, sure, she’s going to have to pay the taxes somewhere down the road, but it would still only be $90,000 in taxes. Tiva’s earnings, even with taxes, still offer a net of almost $50,000 better than what Ryan earned with the exact same investment in a taxable account.

 

The Power of Tax Deferral

(Assumes $100,000 invested; 33% combined federal and state tax bracket)

  5 years 10 years 15 years 20 years
Ryan $125,755 $158,144 $198,874 $250,094
Tiva $140,255 $197,715 $275,903 $386,968

 

This chart makes it easy to understand that investing with a tax-deferred account will always win out over a taxable brokerage account. You can take advantage of the tax savings with a Self-Directed IRA or Solo 401(k), and this way you can also invest in alternatives (real estate, private equity, peer-to-peer loans, etc.) should you choose to.

 


 

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