Tax-Free vs. Tax-Deferred?

Both plans have $25,000 in an account

Tax-free: the account pays 5%, compounded annually. There is no income tax on the earned interest.

Tax-deferred: account pays 7%, compounded annually. At maturity the earned interest is taxable at a rate of 40%

Which is better and why? An example of how to do both would be helpful.

4 Answers

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  • Don G
    Lv 7
    7 years ago
    Best Answer

    The tax free plan will earn 15,722 in 10 years at 5%. (40,722 - 25,000)

    The tax deferred plan will earn 24,179 in 10 years at 7%. For an individual in the 15% tax bracket, that will net to 20,552.

  • 7 years ago

    Is 60% of 7 -- what you have after tax on the taxable investment -- more or less than 5? Do the math; it's 4th grade stuff.

  • 7 years ago

    Can do on a Spreadsheet in like 3 minutes. Out 10 years, in the tax free way, you get $40,722.37, tax deffered you get $24,898.82 after your 40% taxes.

    So tax free is better, as it almost always would be.

  • tro
    Lv 7
    7 years ago

    what's the question about TAX FREE?

    regardless of the interest, tax free is tax free and if this is your goal, that would be your choice

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