Return
to Individual Retirement Accounts
Tax-Deferred Growth In An IRA
Traditional IRA
The chart below illustrates the advantages of tax-deferred growth in a fully deductible IRA over after4ax growth in various tax brackets. The results shown in the chart are hypothetical and oversimplified to facilitate understanding.
Invested in an IRA (No Current Tax) |
Approximate Marginal
Tax Bracket |
|||
Years Until Withdrawal of Funds |
$2000 at 6% Growth |
$1600 at 4.8% Growth After 20% Tax |
$1400 at 4.2% Growth After 30% Tax |
$1200 at 3.6% Growth After |
5 |
11,274 |
8,806 |
7,613 |
6,448 |
10 |
26,362 |
19,938 |
16,965 |
14,143 |
15 |
46,552 |
34,011 |
28,453 |
23,326 |
20 |
73,571 |
51,801 |
42,565 |
34,286 |
25 |
109,729 |
74,291 |
59,900 |
47,366 |
30 |
158,116 |
108,723 |
81,194 |
62,977 |
35 |
222,870 |
138,665 |
107,352 |
81,606 |
40 |
309,524 |
184,102 |
139,484 |
103,840 |
Note: Taxes are due at the withdrawal of funds.
Assume: $2,000 annual Investment 6% return per year Investment made at
the end of each year.
Withdrawals from the deductible IRA are taxed as ordinary income. Assuming a 40-year accumulation period and a 40% (state and federal combined) tax bracket, the results would be $1857714 ($309,524 less 40% rot taxes) net, after taxes, with the IRA and $103,840 from the 40 years of investing alter4ax dollars-an increased return of $81,875 with the IRA. This assumes a 40% tax bracket at the time of withdrawal. If the tax bracket at retirement is lower, the tax savings would be even greater.
There is a 10% penalty tax on withdrawals from an IRA before age 59½, unless for disability or death, or if the distribution is paid as an annuity over the life of the IRA owner or the joint lives of the IRA owner and a designated beneficiary, or the distribution is rolled over to another IRA. The 10% penalty will not be imposed if distributions are used to pay medical expenses In excess of 7.5% of adjusted gross income, or, in certain cases, to pay for health insurance premiums for unemployed individuals. Further, the 10% penalty will not be imposed if distributions are used to pay for qualified higher education expenses, or for first time homebuyer expenses.