February 2005
Comparison to Traditional IRA:
A traditional savings plan might yield a 3.0% annual rate of return. A $1,000 contribution that was subjected to an income tax would be worth approximately $892. The following investment results would be obtained with such a plan.
| Year: 1 | Contributions: $892.00 | Accrued Interest: $10.09 | Balance: $902.09 |
| Year: 2 | Contributions: $1,784.00 | Accrued Interest: $47.54 | Balance: $1,831.54 |
| Year: 3 | Contributions: $2,676.00 | Accrued Interest: $113.19 | Balance: $2,789.19 |
| Year: 4 | Contributions: $3,568.00 | Accrued Interest: $207.90 | Balance: $3,775.90 |
| Year: 5 | Contributions: $4,460.00 | Accrued Interest: $332.54 | Balance: $4,792.54 |
| Year: 6 | Contributions: $5,352.00 | Accrued Interest: $488.03 | Balance: $5,840.03 |
| Year: 7 | Contributions: $6,244.00 | Accrued Interest: $675.30 | Balance: $6,919.30 |
| Year: 8 | Contributions: $7,136.00 | Accrued Interest: $895.31 | Balance: $8,031.31 |
| Year: 9 | Contributions: $8,028.00 | Accrued Interest: $1,149.06 | Balance: $9,177.06 |
| Year: 10 | Contributions: $8,920.00 | Accrued Interest: $1,437.57 | Balance: $10,357.57 |
| Year: 11 | Contributions: $9,812.00 | Accrued Interest: $1,761.89 | Balance: $11,573.89 |
| Year: 12 | Contributions: $10,704.00 | Accrued Interest: $2,123.12 | Balance: $12,827.12 |
| Year: 13 | Contributions: $11,596.00 | Accrued Interest: $2,522.37 | Balance: $14,118.37 |
| Year: 14 | Contributions: $12,488.00 | Accrued Interest: $2,960.79 | Balance: $15,448.79 |
| Year: 15 | Contributions: $13,380.00 | Accrued Interest: $3,439.58 | Balance: $16,819.58 |
| Year: 16 | Contributions: $14,272.00 | Accrued Interest: $3,959.96 | Balance: $18,231.96 |
| Year: 17 | Contributions: $15,164.00 | Accrued Interest: $4,523.19 | Balance: $19,687.19 |
| Year: 18 | Contributions: $16,056.00 | Accrued Interest: $5,130.57 | Balance: $21,186.57 |
| Year: 19 | Contributions: $16,948.00 | Accrued Interest: $5,783.44 | Balance: $22,731.44 |
| Year: 20 | Contributions: $17,840.00 | Accrued Interest: $6,483.17 | Balance: $24,323.17 |
| Year: 21 | Contributions: $18,732.00 | Accrued Interest: $7,231.21 | Balance: $25,963.21 |
| Year: 22 | Contributions: $19,624.00 | Accrued Interest: $8,028.99 | Balance: $27,652.99 |
| Year: 23 | Contributions: $20,516.00 | Accrued Interest: $8,878.05 | Balance: $29,394.05 |
| Year: 24 | Contributions: $21,408.00 | Accrued Interest: $9,779.92 | Balance: $31,187.92 |
| Year: 25 | Contributions: $22,300.00 | Accrued Interest: $10,736.23 | Balance: $33,036.23 |
| Year: 26 | Contributions: $23,192.00 | Accrued Interest: $11,748.60 | Balance: $34,940.60 |
| Year: 27 | Contributions: $24,084.00 | Accrued Interest: $12,818.76 | Balance: $36,902.76 |
| Year: 28 | Contributions: $24,976.00 | Accrued Interest: $13,948.44 | Balance: $38,924.44 |
| Year: 29 | Contributions: $25,868.00 | Accrued Interest: $15,139.47 | Balance: $41,007.47 |
| Year: 30 | Contributions: $26,760.00 | Accrued Interest: $16,393.68 | Balance: $43,153.68 |
| Year: 31 | Contributions: $27,652.00 | Accrued Interest: $17,713.02 | Balance: $45,365.02 |
| Year: 32 | Contributions: $28,544.00 | Accrued Interest: $19,099.44 | Balance: $47,643.44 |
| Year: 33 | Contributions: $29,436.00 | Accrued Interest: $20,554.99 | Balance: $49,990.99 |
| Year: 34 | Contributions: $30,328.00 | Accrued Interest: $22,081.76 | Balance: $52,409.76 |
| Year: 35 | Contributions: $31,220.00 | Accrued Interest: $23,681.92 | Balance: $54,901.92 |
| Year: 36 | Contributions: $32,112.00 | Accrued Interest: $25,357.68 | Balance: $57,469.68 |
| Year: 37 | Contributions: $33,004.00 | Accrued Interest: $27,111.35 | Balance: $60,115.35 |
| Year: 38 | Contributions: $33,896.00 | Accrued Interest: $28,945.29 | Balance: $62,841.29 |
| Year: 39 | Contributions: $34,788.00 | Accrued Interest: $30,861.92 | Balance: $65,649.92 |
| Year: 40 | Contributions: $35,680.00 | Accrued Interest: $32,863.78 | Balance: $68,543.78 |
An account balance of $68,543.78 yielding 3.0% will generate $171.35 in monthly interest payments. We will assume that these monthly payments are tax-exempt. In comparison, the proposed plan would be worth $110,870.11 after 40 years, and generate $415.76 in tax-free monthly payments.
In order to match the $415.76 in monthly income generated by the proposed plan, withdrawals must be taken from the principal of this traditional savings plan. However, such withdrawals will erode the account value very quickly.
| Retirement Year: 1 | Account Balance: $65,577.77 |
| Retirement Year: 2 | Account Balance: $62,521.78 |
| Retirement Year: 3 | Account Balance: $59,373.07 |
| Retirement Year: 4 | Account Balance: $56,128.83 |
| Retirement Year: 5 | Account Balance: $52,786.17 |
| Retirement Year: 6 | Account Balance: $49,342.09 |
| Retirement Year: 7 | Account Balance: $45,793.52 |
| Retirement Year: 8 | Account Balance: $42,137.29 |
| Retirement Year: 9 | Account Balance: $38,370.13 |
| Retirement Year: 10 | Account Balance: $34,488.68 |
| Retirement Year: 11 | Account Balance: $30,489.47 |
| Retirement Year: 12 | Account Balance: $26,368.92 |
| Retirement Year: 13 | Account Balance: $22,123.37 |
| Retirement Year: 14 | Account Balance: $17,749.00 |
| Retirement Year: 15 | Account Balance: $13,241.92 |
| Retirement Year: 16 | Account Balance: $8,598.10 |
| Retirement Year: 17 | Account Balance: $3,813.39 |
| Retirement Year: 18 | Account Balance: ($1,116.48) |
Therefore, this traditional savings plan would only provide about 17.8 years of supplemental retirement income. At the end of this period, all account assets would have disappeared. The proposed plan would be able to support a supplemental income of $415.76 per month indefinitely. Not to mention that after 17.8 years, there would still be $22,313.23 in inheritable contributions remaining.
The interest rate for taxed contributions must be increased in order to achieve the same ending balance as an account with tax-deductible contributions.
| Year: 40 | Contributions: $30,000.00 | Accrued Interest: $80,880.15 | Balance: $110,880.15 |
In order for taxed contributions to reach the ending balance of $110,870.11 generated by the tax-free program, the interest rate would need to be increased from 3.0% to 5.0%.
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