The Power of Tax-Deferred Compounding in a Traditional IRA

If you’re able to regularly contribute to a Traditional IRA and are eligible to deduct the contributed amount, it can be a powerful supplement to other retirement benefits.

Take a hypothetical example of Amanda (age 40), who maximizes her annual contribution to her Traditional IRA for 25 years to supplement her retirement income.

  • She receives an annualized return of 5%.
  • Her highest federal marginal income tax bracket is 25%.
  • Her highest marginal state income tax bracket is 5%.

The table below combines the federal and state tax rates to estimate Amanda’s annual and total tax savings. If tax rates should increase, her annual and total tax savings would also increase, making her tax strategy even more desirable.

Amanda’s Age IRA Amount IRA Contribution IRA Balance Annual Tax Savings Total Tax Savings
40   $5,000 $5,250 $1,500 $1,500
41 $5,250 $5,000 $10,763 $1,500 $3,000
42 $10,763 $5,000 $16,551 $1,500 $4,500
43 $16,551 $5,000 $22,628 $1,500 $6,000
44 $22,628 $5,000 $29,010 $1,500 $7,500
45 $29,010 $5,000 $35,710 $1,500 $9,000
46 $35,710 $5,000 $42,746 $1,500 $10,500
47 $42,746 $5,000 $50,133 $1,500 $12,000
48 $50,133 $5,000 $57,889 $1,500 $13,500
49 $57,889 $5,000 $66,034 $1,500 $15,000
50 $66,034 $6,000 $75,636 $1,800 $16,800
51 $75,636 $6,000 $85,717 $1,800 $18,600
52 $85,717 $6,000 $96,303 $1,800 $20,400
53 $96,303 $6,000 $107,418 $1,800 $22,200
54 $107,418 $6,000 $119,089 $1,800 $24,000
55 $119,089 $6,000 $131,344 $1,800 $25,800
56 $131,344 $6,000 $144,211 $1,800 $27,600
57 $144,211 $6,000 $157,722 $1,800 $29,400
58 $157,722 $6,000 $171,908 $1,800 $31,200
59 $171,908 $6,000 $186,803 $1,800 $33,000
60 $186,803 $6,000 $202,443 $1,800 $34,800
61 $202,443 $6,000 $218,865 $1,800 $36,600
62 $218,865 $6,000 $236,109 $1,800 $38,400
63 $236,109 $6,000 $254,214 $1,800 $40,200
64 $254,214 $6,000 $273,225 $1,800 $42,000
65 $273,225 $6,000 $293,186 $1,800 $43,800
The above is based on hypothetical assumptions and not intended to represent the performance of any specific investment company product. It cannot predict or project investment returns.

Amanda’s Income Options at Retirement:
1) Take a lump-sum distribution
2) Take periodic withdrawals over a fixed period of time
3) Create a stream of lifetime annuity income (monthly or quarterly payments)

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The tax information contained herein is not intended to be used and cannot be used by any taxpayer for the purposes of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. Examples included herein are hypothetical and for illustrative purposes only.

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Investment products, insurance and annuity products: are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.

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