Ryan puts $10,000 in pretax income in a tax-deferred retirement savings account earning 8% per year. After 40 years, how much more will the investment have grown as compared to investing $10,000 in a taxable account, assuming his marginal tax rate is 25%?

Question

Quizplus · Accepted Answer

In a tax-deferred account, the full $10,000 grows at 8% for 40 years, resulting in $217,245.57. In a taxable account, the after-tax contribution is $7,500, and it grows at an effective rate of 6% (8% minus 25% tax on gains), resulting in $102,857.53. The difference is $114,388.04.

Ryan Puts $10,000 in Pretax Income in a Tax-Deferred Retirement