 |
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
is based on $2,000 contributed annually and a 28% marginal tax rate.
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. Taxes and possible penalties
would be applied to the tax-deferred amounts shown, upon withdrawal. |
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 28% 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 |
25% |
28% |
33% |
35% |
| Joint Return |
$56,801- $114,650 |
$114,651- $174,700 |
$174,701- $311,950 |
Over $311,950 |
|
| To equal a tax-exempt return of: |
You would need a taxable yield of: |
|
| 3.50% |
4.67% |
4.86% |
5.22% |
5.39% |
| 4.00% |
5.33% |
5.56% |
5.97% |
6.15% |
| 4.50% |
6.00% |
6.25% |
6.72% |
6.92% |
| 5.00% |
6.67% |
6.94% |
7.46% |
7.69% |
| 5.50% |
7.33% |
7.64% |
8.21% |
8.46% |
| 6.00% |
8.00% |
8.33% |
8.96% |
9.23% |
| 6.50% |
8.67% |
9.03% |
9.70% |
10.00% |
| 7.00% |
9.33% |
9.72% |
10.45% |
10.77% |
|
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 2005. Source: SEI
Investments. Past performance does not guarantee future results.
Certain shareholders may be subject to the Alternative Minimum Tax (AMT).
Federal income tax rules will apply to any capital gains distributions. |
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