Amazing Wealth-building Power

All of the money you invest in the plan grows tax-deferred. That means you don't pay taxes on your investment earnings as long as your money stays in the plan. So all of your investment earnings get reinvested, which helps make your account grow faster, which helps your earnings increase, which...well, you get the idea. It's called tax-deferred compounding, and it can help your account grow much faster than, say, a bank CD, where you pay taxes on the interest the bank pays you each year.

Tax-deferred compounding works like a turbocharger on your account. It's truly amazing to watch it operate. The chart below gives you a graphic example of how money compounds over time.

The Power of Tax-Deferred Compounding

Assumes regular investments of $200 a month, 6% average annual return with all earnings reinvested and a 25% tax rate.

This example is for illustrative purposes only. The tax rate used in the example is for comparison purposes. The specific tax rates used for the annual income during the year of withdrawal may differ from example.

Notice how compounding acts like a runaway train, speeding up as the years go by. After 35 years, with no taxes to eat into the returns, the tax-deferred account is really burning up the rails. After 40 years, its value is almost $130,000 more than the taxable account. The only difference between the two accounts is that 25% of the investment earnings in the taxable account are being handed over to the IRS every year. But remember we're talking tax-deferred, not tax-free. Taxes would need to be paid upon withdrawal based on your tax rate at the time of withdrawal. That's the power of tax-deferred compounding in a long-term retirement savings plan!

See for yourself:
You can see tax-deferred compounding in action by using the Plan Savings Calculator. Future account balance projections shown assume a tax-deferred investment growth rate, and tax-deferred savings rate if a percentage (%) is indicated in the "before-tax contributions" field.