Paul and Carolyn are both 65 and have just retired from their full-time careers. They are in good health, and like other individuals their age, have life expectancies of another 20 years. During their working years, they had set aside $80,000 in taxable accounts in addition to their retirement savings. These taxable accounts are invested in mutual funds that hold a mixture of stocks and bonds. They have arranged for the automatic reinvestment of all dividend and capital gain distributions so that they can build this account during the next 20 years or more to use for long-term care or other emergencies. If they were able to defer taxes on automatically reinvested capital gain distributions, they would have an additional $5,100 after taxes when they turn 85, which is an extra year’s worth of returns.

Paul and Carolyn’s Cohorts: There are about 6 million Americans who are 65 or older with investments in taxable stock, hybrid, and bond mutual fund accounts.

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