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Over the long haul, efforts to minimize taxes can provide a<br />
h<strong>and</strong>some payoff. Figure 3 below demonstrates the growth<br />
of hypothetical taxable investments of $10,000 in two mutual<br />
funds. Both funds have pre-tax total returns of 10% a year, but<br />
their after-tax returns are different. Investors in one fund paid<br />
taxes equal to 10% of their earnings (for an after-tax return of<br />
9% a year), <strong>and</strong> investors in the other fund paid taxes equal to<br />
30% of their earnings (for an after-tax return of 7% a year).<br />
Though the advantage is not dramatic at first, it becomes huge<br />
as earnings compound over time. After 30 years, the investment<br />
with the smaller tax bite grows to almost $133,000 after taxes—<br />
about 75% more than the $76,123 produced by the more heavily<br />
taxed fund.<br />
Figure 3<br />
The Effect of <strong>Taxes</strong> Over the Long Term<br />
$140000<br />
120000<br />
100000<br />
18<br />
80000<br />
60000<br />
40000<br />
20000<br />
0<br />
$132,677<br />
9% Annual Return<br />
$76,123<br />
7% Annual Return<br />
5 10 15<br />
Years<br />
20 25 30<br />
This example, which assumes original investments of $10,000 each, is for illustrative<br />
purposes only <strong>and</strong> does not imply returns available on any particular investment.
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