Most people roll their investment earnings back into their investment account. They pay the additional taxes due each year from their lifestyle. At some point in the future the tax due will exceed their annual savings. Hint: When you step forward to answer the third question, the program automatically searches for the year in which the tax is equal to or greater than your contribution. This is a very important screen because it illustrates to the client that they may not be able to afford to continue compounding their interest because of the increasing taxes. First lets assume that this particular client can only afford to save $5,000 each year as is represented in the default numbers. Compound interest creates a tax, which is due each year. In year one the client pays little attention to the additional taxes due. Since they are rolling the interest back into the account each year, the tax liability is getting larger each year as well. At some point, their lifestyle may not continue to support the investment contribution and the taxes due, unless they are capable of finding additional funds to pay the tax. They have basically two choices. One would be to pay the taxes out of their lifestyle or secondly they could begin paying taxes by withdrawing the taxes due from the investment account. Either way they are going to have less than they had anticipated. This screen offers a great opportunity for you to discuss other avenues, which can avoid transferring these taxes and incurring the additional cost of the tax. |
What do most people do with the interest they earn in their investment account? Most let it compound through re-investment. Very few people pay the taxes due on their investment from the interest earned in the investment. They roll the interest back into the account, which gives the appearance of the magical growth. Where do they get the money to pay the additional taxes due from the investment? It usually comes from another source, which we are calling lifestyle. Most likely the taxes due from their investment results are included in their overall tax picture and go unnoticed. Unnoticed for a while which brings us to the next point. In what year will the annual tax due be more than your annual contribution? |
The software performs a simple comparison between the annual ordinary taxes due and the initial contribution entered on screen one and returns the year in which the annual ordinary taxes due exceed the initial contribution. A year-by-year illustration of this solution is displayed in worksheet form by clicking the Documentation button. |