RLF Enrollment - Web Book - Ready - Flipbook - Page 15
3.
THE POWER OF TAX DEFERRAL
If you think tax deferral sounds like a potentially
valuable benefit of your retirement savings plan,
you’re right.
Consider the difference in growth between a
tax-deferred retirement savings plan account and a
taxable investment account. The chart shows that
if you invested just $200 a month in a tax-deferred
account earning 8% for 30 years, it would grow to
$300,059. The same investment in a taxable account
would total only $138,848. Both accounts assume
a 28% federal tax rate. This example is hypothetical
and cannot be guaranteed.
Over time, tax deferral has the potential to make a
significant difference in your ability to build a
retirement nest egg that lasts. Why? Because more
of your money is going to your retirement
investments, not to the IRS. In our example, $15,000
annual withdrawals are made from both accounts
after year 30, but the tax-deferred account lasts
longer.
Keep in mind, however, that the government
generally doesn’t look favorably on people making
withdrawals from their retirement savings accounts
before retirement. To discourage the practice, a 10%
penalty on early withdrawals may be imposed on
“distributions” (withdrawals) taken before age 59 1/2,
in addition to whatever local and federal income
taxes you may owe. Resist the urge to use your
retirement savings plan account for anything other
than retirement. In addition to possibly incurring a
tax penalty, you could be depriving yourself of
potential future income.
The Benefits of Regular Contributions:
When you contribute a predetermined
amount of money to your retirement savings
plan on a regular basis, you’re using a
strategy called “dollar cost averaging” (DCA).⁶
DCA offers an important benefit.
How? DCA may allow you to take advantage
of price swings in the market. That’s because
your regular contribution can buy more
investment shares when prices go down, and
fewer when prices go up. For example, if one
share of an investment costs $5 one month, a
$40 contribution buys eight shares. If the price
drops to $4, the same amount buys 10 shares.
The advantage is that, over time, your average
cost per share may be less than the
investment’s average price per share.
Regular investing does not guarantee a profit or protect against
a loss in a declining market. Dollar cost averaging involves
continuous investment in securities regardless of fluctuating
price levels of the securities.
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