Here is an interesting comparison of three different customers of a local bank.
A 35-year old person has $50,000 in a Roth IRA at their bank earning 6%. Assuming they are in a 40% marginal income tax bracket and the Roth IRA continues to earn the same interest rate throughout, how much money will this person have at age 65?
The account would compound to $287,175 over the 30-year time period. And if it is cashed in at age 65, no tax would be due because qualified distributions such as this from Roth IRAs are income tax-free.
Another 35-year old customer at the same bank puts $50,000 in a tax-deferred fixed annuity appreciating in value at the same 6% crediting rate. Assuming this customer is in the same 40% marginal income tax bracket and the annuity continues to earn the same rate throughout the 30-year holding period, how much money would they have at age 65?
This person would have accumulated $287,175 as well. But if the annuity were to be cashed in at 65, $94,870 would have to be paid in income taxes (40% of the taxable gain above the initial $50,000 after-tax premium paid into the annuity).
Yet another 35-year old person opened an ordinary Certificate of Deposit at this bank (commonly referred to as a CD) with a $50,000 deposit, compounding the 6% interest in the account each time it renewed until age 65 without making any withdrawals. Assuming the same 40% marginal income tax bracket and a level interest rate throughout, how much money would this person have in the account at age 65?
This person would have accumulated $287,175, too. But there are more factors to consider than might appear at first glance. Taxes would have had to be paid annually along the way each year at the same 40% marginal rate, but this bank customer would have had to pay another cost perhaps without even being aware.
Although the three people above have the same amount of money at age 65, their individual costs to acquire the $287,175 in their respective accounts were quite different.
The LEAP SYSTEM® may help you eliminate some or all of the financial costs associated with owning a taxable compound interest account while still maintaining its benefits. LEAP uses a unique cash flow money strategy to help accomplish these goals.
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