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Tax Deferral Definition Use our free tax deferral calculator to easily calculate complicated tax deferral rates! This calculation looks at the future value of an amount invested in a taxable account versus an amount invested in a deferred account, both before taxes and after taxes. This calculation can give you an idea of how to invest your money and where to invest your money for the best tax treatment possible. It looks at factors like how long you want to keep your investments, your expected rate of return, and your applicable tax rates for investment income and for ordinary income. Pre-Tax Settlement Fee The pre-tax settlement fee is the amount you are hoping to invest. Choose a number that accurately reflects the kind of income you have to put into investments that you do not anticipate needing for any reason in the near future. If you are unsure, be conservative with the value. Investment Time Horizon This is the amount of time you are hoping to hold your investments. When choosing a time horizon, consider factors like your age, future events you may be able to anticipate and the purpose of your investments. For example, if you are saving for retirement, your time horizon will likely be 20 years or longer. Investment Rate of Return This is the rate of return you hope to receive on your investment. If you are looking towards an aggressive investment allocation, this number will be higher than if you are interested in a low risk fixed income portfolio. If you are not sure where to start, choose an average value based on your chosen time horizon, such as 8% for a 20 year investment. Ordinary Income Tax Rate This is the tax rate you pay on all normal income, such as income reported on a W-2 or a 1099. If you do not know your tax rate, the IRS provides tax rate tables each year with the current year’s rates. Estimate your Adjusted Gross Income to choose your tax rate. Investment Income Tax Rate This is the tax rate you pay on investment income. Different levels of capital gains are taxed at different rates. Choose the rate you expect to pay based on your average investment income. Keep in mind that as of 2013, there is a new tax rate on investment income over a certain threshold. When you are done filling in the fields, click the Calculate button. The calculator will now show you results for two different strategies: paying taxes and investing post-tax dollars and deferring tax payments and investing pre-tax dollars. It also shows the amount of each strategy net of all taxes and gross of all taxes. This way, you can see a clear picture of the different investment strategies you have at your disposal. The calculator also shows you the total difference between investing in taxable accounts and tax deferred accounts, letting you see the difference between each type of investment. This will allow you to see the true benefits and savings of tax deferred accounts. How to Calculate Tax Deferral Let's be honest - sometimes the best tax deferral calculator is the one that is easy to use and doesn't require us to even know what the tax deferral formula is in the first place! But if you want to know the exact formula for calculating tax deferral then please check out the "Formula" box above. |