Tax-Deferred Growth
Tax-Deferred Growth refers to the investment growth that is not subject to taxation until the investor withdraws funds or realizes a gain. This means that any interest, dividends, or Capital gains earned on the investment can be rEINvested, potentially leading to greater accumulation of wealth over time since taxes do not reduce the investment’s growth in the interim.
Common examples of tax-deferred accounts include:
- 401(k) plans: Contributions are made pre-tax, allowing the funds to grow without immediate tax implications.
- Traditional IRAs: Similar to 401(k)s, contributions may be tax-deductible, and taxes are owed upon withdrawal in retirement.
- Deferred annuities: These financial products allow for investment growth without annual tax on the earnings until withdrawal.
In a scenario where an individual invests $5,000 in a tax-deferred account earning an average annual return of 7%, after 20 years, the investment would grow to approximately $19,000. If this investment were in a taxable account, the tax on earnings could significantly reduce the amount available for rEINvestment, leading to lower overall growth.