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Taxable vs. Tax Advantaged Investments

How taxes are applied to an investment can make an incredible difference. This calculator is designed to help compare a normal taxable investment to two common tax advantaged situations: an investment where taxes are deferred until withdrawals are made, and an investment where taxes are paid on money that goes into the account, but all withdrawals are tax free.

While this calculator can provide you with some insight, it was developed to be very general and may not fit everyone’s personal situation. Please feel free to contact our office after using this calculator so that we can perform a more thorough analysis.

Definitions

Annual rate of return
This is the annual rate of return you expect from your investments after taxes. The actual rate of return is largely dependent on the type of investments you select. The S&P 500 for the ten years ending on December 31st, 2011 had an annual compounded rate of return of 2.92%, including reinvestment of dividends. From January 1970 through the end of 2011, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.01% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

Years to contribute
Number of years you plan on making contributions.
Years of withdraws
Number of years you plan on taking distributions. Enter “1” for a lump sum distribution. All distributions are assumed to happen at the beginning of the period.
Existing balance
Any existing balance for the accounts.
New contributions
Your periodic contribution. All contributions are assumed to happen at the beginning of the period.
Contribution frequency
The frequency of your contributions. The options are Monthly, Quarterly, or Annually. All contributions are assumed to be made at the beginning of the period.
Withdrawal frequency
The frequency of your distributions. The options are Monthly, Quarterly or Annually. All distributions are assumed to be taken at the end of the period.
Tax during contributions / withdrawals*
Your estimated marginal tax rate. You can use the table below to assist you in determining your current tax rate.

 

Filing Status and Income Tax Rates 2012

Tax rate Married filing jointly

or qualified widow(er)

Single Head of household Married filing separately
10% $0 – 17,400 $0 – 8,700 $0 – $12,400 $0 – 8,700
15% $17,400 – 70,700 $8,700 – 35,350 $12,400 – 47,350 $8,700 – 35,350
25% $70,700 – 142,700 $35,350 – 85,650 $47,350 – 122,300 $35,350 – 71,350
28% $142,700 – 217,450 $85,650 – 178,650 $122,300 – 198,050 $71,350 – 108,725
33% $217,450 – 388,350 $178,650 – 388,350 $198,050 – 388,350 $108,725 – 194,175
35% over $388,350 over $388,350 over $388,350 over $194,175

 

Source: Revenue Procedure 2011-52 http://www.irs.gov

*Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the hypothetical investments shown. Investors should consider their personal investment horizon and income tax bracket, both current and anticipated, when making an investment decision, as these may further impact the comparison.

Increase tax-deferred contribution by tax deduction savings
If you check this box the calculator will assume contributions to the tax-deferred investment are tax deductible when they are made. The calculator will then increase the contribution amount for the tax-deferred investment by the amount required to make the net contribution equal to the investments that have contributions made on an after tax basis.

 


Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

Calculators are provided by an independent third party and are being made available to you as self-help tools for your independent use and are not intended to provide investment advice or be representative of actual results. We do not guarantee their applicability or accuracy in regards to your individual circumstances. The determinations made by these calculators should not be construed as guarantees or projections. Moreover, the reasonableness of certain information may change over time because of changes in tax law, investment trends and your personal circumstances. The information contained here is based on current law and has been obtained from sources believed to be reliable, but we do not guarantee its accuracy. Investment results can vary considerably depending on the type of securities involved, general market conditions and other factors. It is important that you periodically review and update your plans. Raymond James does not provide tax or legal advice. You should contact your tax or legal advisor concerning your particular situation. All investments carry a degree of risk, and past performance is not a guarantee of future results.

 

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