Tax-aware investing
Tax deferral, measured: taxable vs. tax-deferred growth
A taxable vs. tax-deferred calculator that compares the same after-tax contributions growing in a taxable account, taxed each year, and a tax-deferred account taxed at withdrawal.
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How much is tax deferral worth?
In a taxable account, part of each year's return goes to tax, so money grows at a lower effective rate; at a 7% return and 24% tax rate, about 5.3%. In a tax-deferred account, the full return compounds and gains are taxed once at withdrawal. The longer the time and the higher the rate, the bigger the advantage.
Year-end planning and after a big taxable distribution
Clients with maxed retirement accounts, or those offered deferred annuities, wonder where additional savings should go. Year-end tax bills on fund distributions make the question sharper.
What the client types into a search box
“is it better to invest in a taxable account or tax deferred”
How a client works through it
Enter investment and contributions
Initial amount and annual after-tax contributions.
Set years and return
Time frame and annual return.
Enter both tax rates
Rate on taxable returns now and on withdrawal later.
Compare
After-tax values of each and the advantage of deferring.
What lands in your inbox
When a client asks your firm to review the result, the request arrives as a contact record with their inputs and results attached, by email and, on paid plans, by webhook to your CRM.
Received
Investment, contributions, years and two tax rates show the scale and the client's tax expectations. High current rates with long horizons favor deferral; clients considering annuities need a fee-aware comparison.
Where the deferral advantage comes from
Taxable (After Tax) grows at the return reduced by the annual tax. Tax-Deferred (After Tax) grows at the full return, then pays tax on gains at withdrawal. Advantage of Deferring is the difference.
If the withdrawal rate is much higher than today's rate, the advantage can shrink or reverse.
Results shown: Tax-Deferred (After Tax) · Taxable (After Tax) · Advantage of Deferring.
Why do CPA firms and advisers both use this comparison?
Asset location, deciding which investments go in which accounts, is one of the clearest ways to add after-tax value. The calculator gives clients the intuition; the firm does the detailed placement.
It also helps evaluate deferred annuity pitches honestly, since deferral's value must be weighed against fees and ordinary-income treatment.
Follow-ups this request opens
- Plan asset location across taxable and retirement accounts
- Evaluate a deferred annuity offer including fees
- Use tax-efficient funds in taxable accounts
- Consider Roth options alongside deferral
What this calculator leaves out
- Taxable returns taxed annually at one rate; qualified dividends and long-term gains may be lower.
- Fees, such as annuity charges, are not included.
- Constant return and rates.
- No early-withdrawal penalties modeled.
Platform disclaimer shown under the calculator: Estimates only. Assumes after-tax contributions, taxes on the taxable account paid annually from returns, and tax on the deferred account's gains at withdrawal. Your situation may differ.
Compliance note for firms
Comparisons used to recommend a deferred annuity must include fees, surrender charges and the ordinary-income treatment of gains; incomplete comparisons can be misleading under SEC and FINRA rules. Keep the calculator educational.
Not legal advice. See our disclaimer and the guide to compliance for client calculators.
Terms your client sees in the calculator
These definitions appear in the calculator's collapsible Definitions block, so clients don't have to call to ask what a label means.
- Taxable account
- An ordinary brokerage or savings account with no special tax treatment. Interest, dividends and realized gains are taxed as they occur. This calculator assumes the tax on each year’s return is paid out of that return at your current rate, which slows compounding compared with a sheltered account.
- Tax-deferred account
- An account, such as a traditional IRA, 401(k) or annuity, where investment earnings are not taxed each year and instead are taxed when withdrawn. Here contributions are treated as after-tax money, so only the gains are taxed at withdrawal, at the rate you enter for that time.
- Tax drag
- The reduction in growth caused by paying tax on returns every year instead of letting them compound. At a 7% return and a 24% tax rate, a taxable account effectively grows at about 5.3% a year. Over long periods this gap in compounding is the main source of the advantage of deferring.
- Marginal tax rate
- The rate that applies to your next dollar of income, which is the rate that matters for additional investment earnings. It is usually higher than your average (effective) rate. The calculator applies your current marginal rate to the taxable account’s return each year.
- Tax rate at withdrawal
- The rate you expect to pay on the tax-deferred account’s gains when you take the money out, often in retirement. If it is lower than your rate today, deferring gains extra value; if it is higher, some or all of the advantage can disappear. Since future rates are unknown, testing a few values is worthwhile.
- After-tax value
- What each account is worth once all taxes are settled. For the taxable account, taxes were paid along the way, so it is the ending balance. For the tax-deferred account, it is the ending balance minus tax on the accumulated gains at your withdrawal rate. This is the fair basis for comparing them.
In our glossary: Tax-deferred · Asset location
Taxable vs. Tax-Deferred calculator: questions from firms and clients
What is tax drag?
The reduction in growth caused by paying tax on returns each year.
Is a deferred annuity always better?
No. Fees and ordinary-income treatment can outweigh deferral.
How are taxable returns taxed here?
At the single rate entered, annually.
What about qualified dividends?
They're often taxed at lower rates, which reduces drag.
Does it include a Roth option?
See the three-way comparison.
Are contributions deductible here?
No, contributions are after tax in both accounts.
Does time matter?
Yes, the advantage grows with time.
Which plan includes it?
Network. See pricing.
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