{"id":822,"date":"2018-10-25T19:45:00","date_gmt":"2018-10-25T19:45:00","guid":{"rendered":"https:\/\/www.simplywise.com\/blog-2023\/?p=822"},"modified":"2023-06-22T21:52:07","modified_gmt":"2023-06-22T21:52:07","slug":"tax-deferred-growth-worth","status":"publish","type":"post","link":"https:\/\/www.simplywise.com\/blog\/tax-deferred-growth-worth\/","title":{"rendered":"When is Tax Deferred Growth Worth It?"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"822\" class=\"elementor elementor-822\">\n\t\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-1d79411 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"1d79411\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-08351b4\" data-id=\"08351b4\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-6ef6b2b elementor-widget elementor-widget-text-editor\" data-id=\"6ef6b2b\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.13.3 - 28-05-2023 *\/\n.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#69727d;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#69727d;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block}<\/style>\t\t\t\t<p>Investors over the age of 50 are constantly being pitched on the virtues of tax deferred annuities. In this post, we\u2019ll look at some concrete numbers to figure out when tax deferral actually makes sense for many investors and savers. We\u2019ll identify cases where it may make sense and cases where it doesn\u2019t. Next time you hear about the virtues of tax deferral, you\u2019ll have a sense for whether it\u2019s right for you.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-086d76a elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"086d76a\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-9516b34\" data-id=\"9516b34\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-0fd012a elementor-widget elementor-widget-template\" data-id=\"0fd012a\" data-element_type=\"widget\" data-widget_type=\"template.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-template\">\n\t\t\t\t\t<div data-elementor-type=\"section\" data-elementor-id=\"196\" class=\"elementor elementor-196\">\n\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-339b45e0 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"339b45e0\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-3f771e94\" data-id=\"3f771e94\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-44435407 elementor-cta--skin-classic elementor-animated-content elementor-bg-transform elementor-bg-transform-zoom-in elementor-widget elementor-widget-call-to-action\" data-id=\"44435407\" data-element_type=\"widget\" data-widget_type=\"call-to-action.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<link rel=\"stylesheet\" href=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/elementor\/css\/custom-pro-widget-call-to-action.min.css?ver=1764022918\">\t\t<a class=\"elementor-cta\" href=\"https:\/\/simplywise.app.link\/Iv0wVANrvfb\">\n\t\t\t\t\t\t\t<div class=\"elementor-cta__content\">\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-content-item elementor-cta__content-item elementor-icon-wrapper elementor-cta__icon elementor-view-default\">\n\t\t\t\t\t\t<div class=\"elementor-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"far fa-lightbulb\"><\/i>\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<h2 class=\"elementor-cta__title elementor-cta__content-item elementor-content-item\">DID YOU KNOW?<\/h2>\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-cta__description elementor-cta__content-item elementor-content-item\">\n\t\t\t\t\t\tRetirement is 99% easier when your paperwork is organized. \n\nJoin 250,000+ Americans securely storing their important receipts, bills &amp; documents with the SimplyWise app.\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-cta__button-wrapper elementor-cta__content-item elementor-content-item \">\n\t\t\t\t\t<span class=\"elementor-cta__button elementor-button elementor-size-md\">\n\t\t\t\t\t\tGet the App\t\t\t\t\t<\/span>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-e65b049 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"e65b049\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-6e4fc02\" data-id=\"6e4fc02\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-49cc76e elementor-widget elementor-widget-text-editor\" data-id=\"49cc76e\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<h2>What is tax deferral exactly?<\/h2><p>Tax deferred accounts allow investment gains to accumulate tax free until the investor withdraws money from the account. The most common types of tax deferred investments are\u00a0<a href=\"https:\/\/www.investopedia.com\/terms\/i\/ira.asp\">Individual Retirement Accounts (IRAs)<\/a>\u00a0and deferred annuities.<\/p><h2>Why might this be a good idea?<\/h2><p>If your tax rate when you withdraw money is less than your tax rate now, you stand to save on taxes. Tax deferral doesn\u2019t reduce your taxes; it just changes when you pay them and in some cases whether you pay ordinary income or capital gains. How much money you can lose\/save \u00a0with tax deferral depends on a number of factors: your rate of return, your tax rate now, and your tax rate during retirement and fees associated with a tax deferred vehicle.<\/p><h2>Analyzing Tax Deferral for Bonds and Stocks<\/h2><p>We\u2019re going to analyze the effect of tax deferral on two types of instruments: a fixed income instrument and a stock ETF.\u00a0Many fixed income instruments, such as\u00a0<a href=\"https:\/\/www.simplywise.com\/blog\/guide-to-a-cd-certificate-of-deposit\/\">CDs<\/a>\u00a0and\u00a0<a href=\"https:\/\/www.simplywise.com\/blog\/investing-in-bonds-introduction\/\">bonds<\/a>, tend to be tax inefficient, because they require you to pay taxes on any interest earned every year, whether or not you can withdraw that interest. Stock ETFs tend to be more tax efficient because their returns come from two sources: dividends and price appreciation. The dividends are taxed at ordinary income when they are paid out, while the price appreciation is taxed at the\u00a0<a href=\"https:\/\/www.fool.com\/retirement\/2018\/12\/09\/long-term-capital-gains-tax-rates-in-2019.aspx\">lower capital gains rate, assuming the ETF is held onto for more than a year<\/a>.<\/p><h2>Fixed Income Instruments<\/h2><p><a href=\"https:\/\/www.simplywise.com\/blog\/guide-to-a-cd-certificate-of-deposit\/\">A\u00a0certificate of deposit (CD)<\/a>, pays a holder a fixed rate of return each year and is not tax deferred. This means that the CD would pay you interest every year, but it is also taxed on a yearly basis, whether you withdraw the money or not. The second,\u00a0<a href=\"https:\/\/finance.yahoo.com\/news\/multi-guaranteed-annuity-myga-161453804.html\">a Multi-Year Guaranteed Annuity (MYGA)<\/a>, also pays a holder a fixed rate of return a year but is tax deferred. It is the insurance industries version of a CD. In our analysis, we are going to assume that both the CD and the MYGA pay the same rate of interest a year.<\/p><h3>Scenario #1: Tax Rate Stays The Same<\/h3><p>Joe is a 55 year old plastic surgeon. For the next 10 years he puts $100,000 into a CD and $100,000 into a MYGA that grows tax deferred. They both grow his money at the same yearly rate of 2.65%. Joe\u2019s current tax rate is 32%, and we assume it stays at the same rate even after 10 years.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-fe5b65c elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"fe5b65c\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-af3a0e0\" data-id=\"af3a0e0\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-cc6bc7f elementor-widget elementor-widget-image\" data-id=\"cc6bc7f\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.13.3 - 28-05-2023 *\/\n.elementor-widget-image{text-align:center}.elementor-widget-image a{display:inline-block}.elementor-widget-image a img[src$=\".svg\"]{width:48px}.elementor-widget-image img{vertical-align:middle;display:inline-block}<\/style>\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"422\" src=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_1.png\" class=\"attachment-large size-large wp-image-825\" alt=\"\" srcset=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_1.png 930w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_1-300x198.png 300w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_1-768x506.png 768w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-81e9386 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"81e9386\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-5062f22\" data-id=\"5062f22\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-c83f5dd elementor-widget elementor-widget-text-editor\" data-id=\"c83f5dd\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>Let\u2019s look at what would happen with both a CD and MYGA deferred annuity. During this 10 years, Joe\u2019s tax rate remains constant at 32%. Over the course of those 10 years, his CD\u2019s value would increase from $100,000 to about $130,000 (total growth of $30,000), with him paying roughly $10,000 in taxes over the course of his term. This would bring the net value of his CD to $120,000 at the end of the 10 years. Because Joe\u2019s tax rate remained constant, the value of his MYGA deferred annuity would end up the same ($120,000) as his CD, with Joe paying the full $10,000 in taxes at the end of his term, rather than over the course of the full 10 years. In this scenario, both the CD and the annuity have the same value; the taxes are just paid differently.\u00a0<i>Result: Joe is indifferent about deferring taxes<\/i><\/p><h3>Scenario #2: Tax Rate Drops in Retirement<\/h3><p>Scenario 2 is the same as scenario 1, except that we assume Joe\u2019s tax rate drops to 12% in year 10 when he retires.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-4d840fb elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"4d840fb\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-73a57ec\" data-id=\"73a57ec\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-3e23bc5 elementor-widget elementor-widget-template\" data-id=\"3e23bc5\" data-element_type=\"widget\" data-widget_type=\"template.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-template\">\n\t\t\t\t\t<div data-elementor-type=\"section\" data-elementor-id=\"196\" class=\"elementor elementor-196\">\n\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-339b45e0 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"339b45e0\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-3f771e94\" data-id=\"3f771e94\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-44435407 elementor-cta--skin-classic elementor-animated-content elementor-bg-transform elementor-bg-transform-zoom-in elementor-widget elementor-widget-call-to-action\" data-id=\"44435407\" data-element_type=\"widget\" data-widget_type=\"call-to-action.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<a class=\"elementor-cta\" href=\"https:\/\/simplywise.app.link\/Iv0wVANrvfb\">\n\t\t\t\t\t\t\t<div class=\"elementor-cta__content\">\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-content-item elementor-cta__content-item elementor-icon-wrapper elementor-cta__icon elementor-view-default\">\n\t\t\t\t\t\t<div class=\"elementor-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"far fa-lightbulb\"><\/i>\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<h2 class=\"elementor-cta__title elementor-cta__content-item elementor-content-item\">DID YOU KNOW?<\/h2>\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-cta__description elementor-cta__content-item elementor-content-item\">\n\t\t\t\t\t\tRetirement is 99% easier when your paperwork is organized. \n\nJoin 250,000+ Americans securely storing their important receipts, bills &amp; documents with the SimplyWise app.\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-cta__button-wrapper elementor-cta__content-item elementor-content-item \">\n\t\t\t\t\t<span class=\"elementor-cta__button elementor-button elementor-size-md\">\n\t\t\t\t\t\tGet the App\t\t\t\t\t<\/span>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-2cb9405 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"2cb9405\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-07f69cd\" data-id=\"07f69cd\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-f5933d2 elementor-widget elementor-widget-image\" data-id=\"f5933d2\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"420\" src=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_2.png\" class=\"attachment-large size-large wp-image-826\" alt=\"\" srcset=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_2.png 933w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_2-300x197.png 300w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_MYGA_2-768x505.png 768w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-8f6e153 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"8f6e153\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-27aca45\" data-id=\"27aca45\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-b8fecb0 elementor-widget elementor-widget-text-editor\" data-id=\"b8fecb0\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>In this scenario, the MYGA deferred annuity would generate about $5,500 more than the CD. That\u2019s because with the CD, Joe would have been paying a steady 32% in years 1-9, and 12% in year 10, totaling $9,000 in taxes over time. With his MYGA deferred annuity, he only pays taxes in year ten. This mean he will be taxed on the total growth of $100,000 to $129,000 at the 12% rate, resulting in a tax bill of $3,500. An annuity was useful here as it saved him $5,500.\u00a0<i>Result: Joe saves $5,500 by deferring taxes.\u00a0<\/i>Lets dig into this specific scenario a little bit more deeply. We see that Joe saves about $5,500 with a tax deferred instrument, but how does the magnitude of money saved change depending on what his tax rate is right now vs. what is will be during retirement?<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-9b84ca6 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"9b84ca6\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-2904f74\" data-id=\"2904f74\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-b4e0b84 elementor-widget elementor-widget-image\" data-id=\"b4e0b84\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"406\" src=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid1.png\" class=\"attachment-large size-large wp-image-827\" alt=\"\" srcset=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid1.png 863w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid1-300x190.png 300w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid1-768x487.png 768w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-97f957a elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"97f957a\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-19aeea2\" data-id=\"19aeea2\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-8675750 elementor-widget elementor-widget-text-editor\" data-id=\"8675750\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>The table above shows how the amount of money Joe would have saved changes based on his current and retirement tax rate. Not surprisingly, if his current tax rate is 37% and his retirement tax rate is 10%, he stands to save the most ($7,166) through tax deferral. If his retirement tax rate is actually higher than his current tax rate, he stands to lose money with tax deferral (as seen in the red cells of the table).\u00a0A key insight from the table above is that what matters is the difference between Joe\u2019s current tax rate and his retirement tax rate. For some savers, this may be a meaningful amount of money saved; for others they may not care. Given current interest rates, you can use this rule of thumb to figure out if tax deferral on a fixed interest rate return is potentially meaningful for you.<\/p><h2>Equities<\/h2><p>Now, we are going to analyze the effects of tax deferral on holding equities. We will assume that Joe buys an\u00a0<a href=\"https:\/\/www.etf.com\/SPY\">SPY ETF<\/a>\u00a0in his brokerage account and holds it for 10 years. We will compare this to putting the money into a tax deferred variable annuity, specifically the Vanguard variable annuity. The Vanguard variable annuity has an annual cost of 0.52%, which is one of the cheapest variable annuities in the market today. We will analyze the tax consequences of the a scenario where the doctor\u2019s tax rate stays the same and a case where his tax rate drops in retirement.<\/p><h3>Scenario #1: Tax Rate Stays The Same<\/h3><p>Joe is 55 years old. For the next 10 years he puts $100,000 into the SPY ETF and $100,000 into a Vanguard Variable Annuity (cost 0.52% a year) that holds SPY. We assume the price appreciation of the S&amp;P 500 over this period is 9% a year, while the dividend yield is 2%. Joe\u2019s current tax rate is 32%, and we assume it stays at the same rate even after 10 years.\u00a0Let\u2019s look at what Joe\u2019s take home earnings are from investing directly in the stock market through SPY. Over the the course of 10 years, we assume the S&amp;P 500 grows at 9% and has a 2% dividend yield. This means that over the course of 10 years, Joe will receive roughly $30,000 in dividends that he will have to pay taxes on each year. Since we assume that the S&amp;P 500 appreciates by 9% a year, at the end of 10 years the $100,000 invested in SPY will be worth $236,000. At that time if Joe sells his holdings of SPY, he will have to pay capital gains taxes on the price appreciation. So what does the total tax bill (taxes on dividends + price appreciation) come out to? We assume the dividends are taxed at 32% in each year, and the price appreciation is taxed at 15%, which makes the total tax bill come out to $30,000. This means that after 10 years, Joe\u2019s take-home gains are $136,000.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-1196bc4 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"1196bc4\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b2356e2\" data-id=\"b2356e2\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-55d1fcb elementor-widget elementor-widget-image\" data-id=\"55d1fcb\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"348\" src=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity1.png\" class=\"attachment-large size-large wp-image-828\" alt=\"\" srcset=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity1.png 931w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity1-300x163.png 300w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity1-768x417.png 768w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-d120c88 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"d120c88\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b9b38aa\" data-id=\"b9b38aa\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-8c74a10 elementor-widget elementor-widget-text-editor\" data-id=\"8c74a10\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>Now, let\u2019s compare that number to if Joe had used a variable annuity to purchase $100,000 in SPY. The key differences are that the variable annuity will cost 0.52% a year, which will be a drag on the price appreciation, and that no taxes will be paid until the 10 years are up. At the end of the term, Joe will have to pay ordinary income tax rates on the growth of his $100,000. Assuming that Joe\u2019s tax rate is at 32% after the 10 years are up, we calculate that Joe\u2019s take home gains are $105,000. That about $30,000 less than if he had just bought SPY in his brokerage account.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-7190631 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"7190631\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-7d1066f\" data-id=\"7d1066f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-7bee396 elementor-widget elementor-widget-image\" data-id=\"7bee396\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"370\" src=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity2.png\" class=\"attachment-large size-large wp-image-829\" alt=\"\" srcset=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity2.png 961w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity2-300x173.png 300w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxes_Scenario1_VariableAnnuity2-768x444.png 768w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-30341ab elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"30341ab\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-cb48629\" data-id=\"cb48629\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-9b381a6 elementor-widget elementor-widget-text-editor\" data-id=\"9b381a6\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>What\u2019s driving the dramatic difference between these situations? There are two reasons: the 0.52% fee on the variable annuity and the fact that the price appreciation in the annuity is taxed at ordinary income instead of the lower capital gains rate.\u00a0<i>Result: Deferring taxes is worse for Joe<\/i><\/p><h3>Scenario #2: Tax Rate Drops in Retirement<\/h3><p>Scenario 2 is the same as Scenario 1, except that we assume Joe\u2019s tax rate drops to 12% in year 10 when he retires.\u00a0In this scenario, the amount of ordinary income taxes Joe pays would go down to 12% from 32%. However, even after this large drop in the tax rate, the take home earnings for Joe on his $100,000 investment is $136,000. That is about how much he would have made if he had just bought SPY in his brokerage account.\u00a0This scenario highlights how big a factor the 0.52% fee on the variable annuity and the difference between the capital gains and ordinary income tax rate is. Even if Joe\u2019s ordinary income tax rate drops to under half of his pre-retirement tax rate, its hard for him to break even on tax deferral because of the fee drag and because of how low long term capital gains taxes are relative to ordinary income taxes.\u00a0A bigger question that we\u2019ll ask is: is there a post retirement tax rate where tax deferral is actually beneficial for Joe? The table below shows the savings\/loss from tax deferral in different pre-retirement and post-retirement tax scenarios.<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-e7f0d07 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"e7f0d07\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-f78b70a\" data-id=\"f78b70a\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-c1808f6 elementor-widget elementor-widget-image\" data-id=\"c1808f6\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"640\" height=\"340\" src=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid2.png\" class=\"attachment-large size-large wp-image-830\" alt=\"\" srcset=\"https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid2.png 863w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid2-300x160.png 300w, https:\/\/www.simplywise.com\/blog\/wp-content\/uploads\/2023\/06\/DeferedTaxesGrid2-768x408.png 768w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-900e723 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"900e723\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-31080ed\" data-id=\"31080ed\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-526d31f elementor-widget elementor-widget-text-editor\" data-id=\"526d31f\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<p>The table shows a stunning finding: its extremely difficult to find pre-tax scenarios where a tax deferred equity investment saves Joe money relative to a non tax deferred investment. The green cells represent tax scenarios where Joe saves money, while the red cells are scenarios where Joe loses money. The lesson is that it may not make sense to use a tax deferred annuity solely for the purpose of buying and holding stocks over a long period of time. Annuities may provide other benefits, such as the ability to protect your gains in the market and to receive a guaranteed monthly income, but the math behind using them solely for the purpose of tax deferral for holding equities over the long term is tough.\u00a0<i>Result: Joe is indifferent about deferring taxes<\/i><\/p><h2>Conclusion<\/h2><p>The conclusion and lessons from our analysis is straightforward:<\/p><ol><li>If you own a fixed income instrument (e.g CD, bond, etc) that is not tax efficient, it is possible to save money using tax deferral if your tax rate is lower in retirement than it is now.<\/li><li>If you own instruments such equity ETFs and hold them for a long period of time without trading them, it is hard to find scenarios where tax deferral using a variable annuity saves you money. The combination of fees and the difference between the ordinary income and capital gains tax rate is a large hurdle to overcome.<\/li><\/ol>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-bb63fa8 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"bb63fa8\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-a9ca337\" data-id=\"a9ca337\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-7363d50 elementor-widget elementor-widget-template\" data-id=\"7363d50\" data-element_type=\"widget\" data-widget_type=\"template.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-template\">\n\t\t\t\t\t<div data-elementor-type=\"section\" data-elementor-id=\"196\" class=\"elementor elementor-196\">\n\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-339b45e0 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"339b45e0\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-3f771e94\" data-id=\"3f771e94\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-element elementor-element-44435407 elementor-cta--skin-classic elementor-animated-content elementor-bg-transform elementor-bg-transform-zoom-in elementor-widget elementor-widget-call-to-action\" data-id=\"44435407\" data-element_type=\"widget\" data-widget_type=\"call-to-action.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<a class=\"elementor-cta\" href=\"https:\/\/simplywise.app.link\/Iv0wVANrvfb\">\n\t\t\t\t\t\t\t<div class=\"elementor-cta__content\">\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-content-item elementor-cta__content-item elementor-icon-wrapper elementor-cta__icon elementor-view-default\">\n\t\t\t\t\t\t<div class=\"elementor-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"far fa-lightbulb\"><\/i>\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<h2 class=\"elementor-cta__title elementor-cta__content-item elementor-content-item\">DID YOU KNOW?<\/h2>\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-cta__description elementor-cta__content-item elementor-content-item\">\n\t\t\t\t\t\tRetirement is 99% easier when your paperwork is organized. \n\nJoin 250,000+ Americans securely storing their important receipts, bills &amp; documents with the SimplyWise app.\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t<div class=\"elementor-cta__button-wrapper elementor-cta__content-item elementor-content-item \">\n\t\t\t\t\t<span class=\"elementor-cta__button elementor-button elementor-size-md\">\n\t\t\t\t\t\tGet the App\t\t\t\t\t<\/span>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Investors over the age of 50 are constantly being pitched on the virtues of tax deferred annuities. In this post, we\u2019ll look at some concrete numbers to figure out when tax deferral actually makes sense for many investors and savers. We\u2019ll identify cases where it may make sense and cases where it doesn\u2019t. Next time [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":823,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-822","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.2 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>When is Tax Deferred Growth Worth It? - SimplyWise Cost Estimator<\/title>\n<meta name=\"description\" content=\"Tax deferred investments can be tricky. Making the right decision could greatly improve returns. 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