The Power of Tax-Deferred Compounding in a Traditional IRA

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If you’re able to regularly contribute to a Traditional IRA and are eligible to deduct the contributed amount, it can be a powerful supplement to other retirement benefits.

Take a hypothetical example of Amanda (age 40), who maximizes her annual contribution to her Traditional IRA for 25 years to supplement her retirement income.

  • She receives an annualized return of 5%
  • Her highest federal marginal income tax bracket is 25%.
  • Her highest marginal state income tax bracket is 5%.

The table below combines the federal and state tax rates to estimate Amanda’s annual and total tax savings. If tax rates should increase, her annual and total tax savings would also increase, making her tax strategy even more desirable.

Amanda's AgeIRA AmountIRA ContributionIRA BalanceAnnual Tax SavingsTotal Tax Savings
The Power of Tax Deferred Compounding in a Traditional IRA
40$5,000$5,250$1,500$1,500
41$5,250$5,000$10,763$1,500$3,000
42$10,763$5,000$16,551$1,500$4,500
43$16,551$5,000$22,628$1,500$6,000
44$22,628$5,000$29,010$1,500$7,500
45$29,010$5,000$35,710$1,500$9,000
46$35,710$5,000$42,746$1,500$10,500
47$42,746$5,000$50,133$1,500$12,000
48$50,133$5,000$57,889$1,500$13,500
49$57,889$5,000$66,034$1,500$15,000
50$66,034$6,000$75,636$1,800$16,800
51$75,636$6,000$85,717$1,800$18,600
52$85,717$6,000$96,303$1,800$20,400
53$96,303$6,000$107,418$1,800$22,200
54$107,418$6,000$119,089$1,800$24,000
55$119,089$6,000$131,344$1,800$25,800
56$131,344$6,000$144,211$1,800$27,600
57$144,211$6,000$157,722$1,800$29,400
58$157,722$6,000$171,908$1,800$31,200
59$171,908$6,000$186,803$1,800$33,000
60$186,803$6,000$202,443$1,800$34,800
61$202,443$6,000$218,865$1,800$36,600
62$218,865$6,000$236,109$1,800$38,400
63$236,109$6,000$254,214$1,800$40,200
64$254,214$6,000$273,225$1,800$42,000
65$273,225$6,000$293,186$1,800$43,800
This table is for illustrative use only to demonstrate the effects of tax-deferred compounding. It is not intended to represent the performance of any specific investment company product. It cannot predict or project investment returns. Taxes, charges and expenses that would be associated with an actual investment, and which would reduce performance, are not reflected. The above also does not reflect any withdrawals during the periods displayed. Please remember that there are inherent risks associated with investing in securities, including the loss of principal. Total returns and the principal value of investments will fluctuate and yields may vary.

Amanda’s income options at retirement:

  1. Take a lump-sum distribution
  2. Take periodic withdrawals over a fixed period of time
  3. Create a stream of lifetime annuity income (monthly or quarterly payments)

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