| When
it comes to planning for a long-term goal like retirement, utilizing
a tax-deferred or tax-free investment makes a big difference. Virtually
everyone stands to benefit from avoiding or deferring taxes on retirement
investments. Over the long term, as the chart below shows, tax-deferred
or tax-free investments may grow much more quickly than taxable investments,
because they lose much less to taxes and investors can thus reinvest
greater amounts.
 |
| This example compares $2,000 annual
investment for a person in the 28% marginal tax bracket.
The growth rate is an assumed 8% per year, compounded annually.
This graph is for illustrative purposes only and is not indicative
of past or future performance of any particular investment.
Actual returns and principal value will fluctuate. Upon
withdrawal, taxes and possible penalties would be applied to
the tax-deferred amounts shown. |
When it comes to investing in tax-free
municipal bonds, the answer to this question depends largely on how
highly you are taxed. Because their level of interest and potential
for growth may not always be able to compete with other types of investments,
tax-free municipal investments are usually recommended for investors
in the higher tax brackets. Since such investors lose a higher percentage
of their income to taxes, the tax advantages of munis often compensate
for the lower interest rate. As a general rule, they're most effective
for investors in or above the 31% federal tax bracket.
But it's also important to remember
that returns on taxable investments can be deceiving, because a
significant portion - at least 15% - will go to taxes. With a tax-free
investment, what you see is what you get.
|
Based
on a Federal tax bracket of:
|
| Federal |
28.00% |
31.00% |
36.00% |
39.60% |
| Joint Return |
$45,200- $109,250 |
$109,250- $166,450 |
$166,450- $297,300 |
Over $297,300 |
|
| To equal a tax-exempt
return of: |
You would need a taxable yield of:
|
|
| 3.50% |
4.86% |
5.07% |
5.47% |
5.79% |
| 4.00% |
5.56% |
5.80% |
6.25% |
6.62% |
| 4.50% |
6.25% |
6.52% |
7.03% |
7.45% |
| 5.00% |
6.94% |
7.25% |
7.81% |
8.28% |
| 5.50% |
7.64% |
7.97% |
8.59% |
9.11% |
| 6.00% |
8.33% |
8.70% |
9.38% |
9.93% |
| 6.50% |
9.03% |
9.42% |
10.16% |
10.76% |
| 7.00% |
9.72% |
10.14% |
10.94% |
11.59% |
|
This tax-equivalent
table is for illustrative purposes only and does not represent
the performance of any particular mutual fund. Share prices
and investment returns will vary, and there can be no guarantee
that any particular fund will achieve a particular tax-exempt
yield. Calculations are for tax year 2001.
Source: SEI Investments. Past performance does not guarantee
future results.
The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent. Furthermore, additional state and local
taxes paid on comparable taxable investments were not used to increase
federal deductions. |
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