Question

Why does a taxminusdeferred retirement account accumulate more money than a taxable​ account, assuming the same amount is contributed every year and the accounts earn the same return every​ year?

Answer 1

Answer:

Simply because tax-deferred accounts are taxed only when the investor receives or withdraws money from them. For example, a 401 (K)'s interest and capital gains are not taxed until the beneficiary retires and starts to receive payments, and that may take a long time.

It is not the same to be taxed immediately, because that reduces the amount invested. For example, you invest have $100 to invest and your income tax rate is 22%.

• a tax-deferred account that earns 5% per year will earn $5, and then the principal will increase to $105 for the next, and keep earning more money.
• a taxable account will only have a $78 after taxes are paid, and if it earns 5%, then it will only earn $3.90 at the end of the year, and the principal will increase to $81.90.