Thirty year-old Maria participates in a 401(k) plan at work and contributes the maximum amount allowed each year. She saw her own parents struggle in retirement, so she understands the importance of retirement savings. Maria just received an inheritance of $25,000 from her uncle, which she has decided to save in a mutual fund in hopes of improving the financial security of her family. She has arranged for the automatic reinvestment of all dividend and capital gain distributions. If she were able to defer taxes on the fund's capital gain distributions that she has automatically reinvested in her account, she would have an additional $12,700 after taxes when she turns 70, which is equivalent to about half the initial inheritance amount!

Maria’s Cohorts: There are about 31 million U.S. individuals who invest in stock, hybrid, or bond mutual funds through a taxable account.

Note: Hypothetical example. Assumes an annual rate of return of 5%; with dividends contributing 1%; realized capital gains, 3%; and unrealized capital gains, 1%. Capital gains and dividends are taxed at 15% federal rate (no state taxes considered). Accumulations are after-tax values at end of horizon indicated. Detail may not add to total because of rounding. Similar to Joint Economic Committee's April 2004 analysis.

Source: Investment Company Institute