Investment & Compound Interest Calculator
Project your portfolio future value. Compare taxable, tax-deferred, and tax-free accounts side-by-side to minimize compound tax drag.
Effective CAGR (Net): 18.46%
Growth Parameters
Contributions Scheduler
Tax Drag Settings
Understanding the Power of Compounding & Tax Drag
Compounding is the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes. However, one of the biggest threats to compounding growth is Tax Drag.
How Tax Drag Erodes Your Returns
When investing in taxable accounts, you pay annual taxes on interest, dividends, and realized capital gains. By taking money out of the portfolio every year to pay taxes, you decrease the compounding base for the next year. Over 20 or 30 years, this causes a major reduction in the final value of your portfolio.
Comparing Account Types
- Tax-Free (Roth): Contributions are made with after-tax cash, but all investment growth and withdrawals at retirement are 100% tax-free. This offers zero tax drag.
- Tax-Deferred (Traditional IRA/401k): Pre-tax contributions reduce your current income tax, and compounding occurs tax-free. You pay standard income tax on all withdrawals during retirement.
- Taxable (Standard Brokerage): Gains are taxed annually. You face constant, yearly tax drag which hampers long-term compounding efficiency.
Frequently Asked Questions About Investment Growth
What is tax drag in investing?
Tax drag is the reduction in an investment portfolio's growth rate caused by taxes paid on dividends, interest, or capital gains. In a taxable brokerage account, paying these taxes annually reduces the amount of capital left to compound, which significantly lowers the final portfolio value over long periods compared to a tax-deferred or tax-free account.
How does compounding frequency affect investment returns?
Compounding frequency determines how often interest is calculated and added to the principal balance. More frequent compounding (e.g., daily or monthly instead of annually) results in slightly higher returns because the interest earned begins earning interest sooner. However, the difference between monthly and daily compounding is generally very small.
What is the difference between tax-deferred and tax-free accounts?
Tax-deferred accounts (like a Traditional IRA or 401k) allow you to contribute pre-tax money and grow it tax-free, but you pay ordinary income tax on all withdrawals during retirement. Tax-free accounts (like a Roth IRA) require you to contribute after-tax money, but the growth is tax-free, and all qualified withdrawals in retirement are completely tax-free.
Does this factor in tax drag on returns?
Yes. Calculate tax drag on taxable vs tax-deferred vs tax-free accounts accurately.