Tax-Wise Investing

Long-term investors have long valued the impact tax deferral can have on their portfolios. For high earners (with greater than $600,000 in annual income)1 these benefits can be substantial. Taking advantage of the full range of tax-deferred investment options available can be critical, and sometimes it’s the simplest strategy that has the most impact.

 

The Rule of 72

If saving for retirement is at the top of your investment priorities, consider the Rule of 72 — and the power of tax-deferred investing. The Rule of 72 is a time-honored maxim that speaks to the power that compound interest can have on a long-term investment. Simply stated, divide 72 by an investment’s growth rate to help estimate when the initial investment could double in value, not taking into account portfolio fees and expenses or federal and state taxes. Applying this same principle to tax deferral helps illustrate how a tax-deferred investment may help benefit a portfolio over the long term.

Conversely, consider how long it could take money in a taxable account to double. Generally speaking, dividing 92 or 114 by the growth rate can estimate how long it would take an investment to double using different tax rates, not taking into account portfolio fees and expenses or state taxes.

 

How long could it take for your investment to double? (measured in years)

Rule of 72, rule of 92, rule of 114

 

Source: Legg Mason. For illustrative purposes only. This table serves as a demonstration of how the Rules of 72, 92 and 114 concepts work from a mathematical standpoint. Results are rounded. It is not intended to represent an investment. The chart uses constant rates of return, unlike actual investments which will fluctuate in value, and is not guaranteed. It does not include fees, taxes or portfolio expenses, which would lower performance. It assumes no distributions are made during these periods. However, lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable. Changes in tax rates and tax treatment of investment earnings may impact the comparative results. Actual returns will vary. Withdrawals of earnings from a tax-deferred account may be subject to ordinary income tax, and early withdrawals can be subject to an additional 10% federal tax and/or surrender charges. If an investor would withdraw their entire account balance at the point of time in which the portfolio value doubled, the redemption amount would be significantly lower. Taxes are assessed annually on taxable accounts. Investors should consider their own personal goals, time horizon and tax bracket when making investment decisions. Past performance does not guarantee future results.

1 On January 1, 2018, the income threshold for the highest tax bracket (37%) was raised to $600,000 (joint filers) and $500,000 (single filers). Source: IRS.

 


Your financial advisor can help you develop a long-term investment plan with a balance of strategies that addresses your need for portfolio growth, income, capital preservation and risk management.

 

 

All investments involve risk, including possible loss of principal. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

Equity investments generally provide an opportunity for more capital appreciation than fixed income investments, but they are subject to greater market fluctuations.

Diversification does not assure a profit or protect against market loss.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.