Myth #4: Taxes Won't Impact Investments

Summary: In traditional financial planning, once one has maxed out their 401k plan (or other qualified plan), they invest the balance in a fully taxable accounts.

The Numbers: The following shows a dollar doubling every year for 20 years without tax, a common hypothetical scenario to illustrate the power of compound growth.  Now, lets take the same example, however in this scenario, Uncle Sam is going to tax the gains each year at 33%:  

The Real World: With astronomical deficits and government spending, rising taxes on both income and investment earnings are seemingly inevitable. Truth is, we are currently experiencing a relatively low historical tax environment. According to USA today, “Americans are paying the smallest share of their income for taxes since 1958, a reflection of tax cuts and a weak economy.” One only needs to look to our country’s past to discover that income tax rates have consistently averaged much higher. Therefore, by deferring taxes into the future, you could very well be at a higher rate which will dramatically effect your net spendable income at retirement.