Value of Tax Deferral

The value of tax deferral is twofold:

  1. The ability to invest the deferred taxes for potential growth
  2. Eventually pay the tax with cheaper dollars, which is in effect a tax reduction

Let’s look at a hypothetical example where the capital gains tax is deferred for 30 years and is invested with a 5% annually compounded rate of return after taxes.

Benefit #1: The first benefit occurs when the deferred capital gains is invested. In the example we used a conservative 5% annually compounded rate of return. Our Capital Gains Tax Deferral Estimator allows you to enter in the rate of return you expect to achieve and see how much your deferred capital gains would grow over various time periods.

Benefit #2: Now let’s also look at the benefit that inflation brings with tax deferral.

If we have a 3% inflation rate over the same 30 year period, $1.00 will be worth about $.40 at the end of 30 years.

deferred-gains-question

We used a conservative 3% inflation rate in the above chart and calculation. Our capital gains tax deferral estimator is very flexible and allows you to enter any inflation rate and see the impact it has on your deferred capital gains tax dollars over time.

To use our interactive tax deferral estimator, simply enter your estimated capital gains tax liability, a rate of return, and inflation rate.

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