Performance Comparison of Retirement Savings Buckets

Pre-Tax and Post-Tax buckets perform better than Tax-Deferred and Taxable. However, Post-Tax accounts provide the best shelter from future taxes.

Tax buckets may be categorized as Taxable, Tax-Deferred, Pre-Tax, or Post-Tax accounts. Account examples and tax treatments are summarized in the table below. Detailed account characteristics are captured in “Tax Treatment of Investment and Retirement Accounts.”

Using the selected example, let us compare how the respective tax-advantages of these accounts play out when keeping the other variables such as contribution and growth rate the same.

Contribution Phase: A $100 earned is subject to a 25% tax rate in our example. Hence, only $75 is available for investment in all the accounts except Pre-Tax where the entire $100 can be invested because the contributions are not taxed.

Growth Phase: We assume that the investment grows at a steady 8% annual rate for the next 10 years. This growth in investment is not taxable except with the Taxable account where the growth portion from the realized gain or interest earned is taxed every year.

Distribution Phase: The account value at the end of growth period, which is 10 years in our example, is withdrawn and is assumed to be a qualified distribution. Note that only the interest portion is taxed for Tax-Deferred, while both the principal and interest are taxed for Pre-Tax.

Pre-Tax and Post-Tax accounts result in the same performance, by design. However, in practice, since both have the same contribution limits (labeled as “Post-Tax Investment” in our example), Post-Tax encourages a less scattered savings approach. With Pre-Tax, the tax deductions will have to be saved in a Taxable account and invested separately. With Post-Tax, this equivalent portion is paid out as taxes to the Government, and in return, the entire Post-Tax savings remains tax-free forever. Post-Tax diversifies future tax risk and helps keep the tax burden low during retirement.

Tax-Deferred account performance is only marginally better than Taxable accounts. However, the contribution limit for After-Tax 401k, a Tax-Deferred account, is quite high at $57K and can be effectively used to beef up your Post-Tax assets. Refer to our “How to Move Asset Between Tax Buckets” article for more information. Finally, Annuities bought inside of a Roth IRA inherits the latter’s Tax-Free characteristics so that the lifetime annuity income also becomes tax free. You can find a detailed account of Annuity related taxes in “Annuity Tax Implications.”

We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at

[thrive_leads id='5565']

Leave a Comment

Your email address will not be published. Required fields are marked *