Taxable vs. Tax Advantaged Investments

The purpose of this Taxable vs. Tax Advantaged Investments Calculator is to help investors compare taxable, tax-deferred and tax-free investment options. To use this tool you will need to enter the annual rate of return, the years to contribute, the years of withdraws, the existing balance, new contribution amounts, tax during contributions and the tax during withdrawals. While tax-free investments sound like the best option to use they tend to have lower return rates than taxable investments. If you are wondering which type of investment to select you may want to run your numbers through this tool. There are a lot of options that you can select; for example, you can select to show withdrawal amounts or yearly balances.

Taxable vs. Tax Advantaged Investments Calculator Overview

There are three main types of investments: taxable, tax deferred and tax free. These are also sometimes known as tax-exempt accounts (TEA) and tax-deferred accounts (TDA).

These types of investment account are intended to encourage people to start saving for retirement as early as possible, through the unquestionable incentive of reducing a person’s overall tax bill across their lifetime.

Tax-deferred accounts ensure that immediate tax deductions from your annual taxable income can be applied to the full amount of a contribution, but any future withdrawals you may make from the investment account are subject to tax. Essentially, you are taxed on the money when you use it, instead of when you save it.

How To Use The Taxable vs. Tax Advantaged Investments Calculator

  1. Estimate the annual rate of return that you are expecting from your investments, and enter it by typing into the box or using the slider
  2. Enter the number of years that you intend to continue contributing to your investments
  3. Input the number of years in which you expect to take a ‘distribution’, or withdrawal, from your investments
  4. Specify the existing balance of your investments
  5. Enter the amount you will be contributing in each period of your investment
  6. Define the periods, or frequency, that you will be contributing to and withdrawing from your investment
  7. Enter the percentage of tax you will pay on your contributions and withdrawals – click the text which says ‘Tax during contributions’ for a reference table that will tell you which tax bracket you fall into
  8. Tick the box if appropriate and click View Report to see your results.

Who is this Calculator for?

This calculator may be helpful if you:

  • Are considering making some investments
  • Would like to compare your ‘take-home’ dividends between the different kinds of tax-beneficial investments
  • Need to calculate your contributions and withdrawals over an extended period of time.

An example of a tax-deferred account in action

You have a taxable income of $40,000 this year, and invest $2,000 into your TDA – your taxable income for this year will therefore be $38,000. Several years later (for example, after you retire) your income is $30,000, and you also withdraw $2,000 from your TDA – your taxable income this year will therefore be $52,000.