What difference does taxation have on your portfolio?

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I have been going through some tax-planning seminars and there was one example that caught my attention. So how does taxation effect your returns?

Let’s take a look.

Assumptions:

30% marginal tax bracket

Initial principal is $1

You earn 100% each year.

Now let’s see how that works out with 2 scenarios.

Scenario 1 - no taxation

$1 will compound at 100% and turn into $1,048,576 in 20 years.

How much less do you think it will become when a 30% taxation is applied each year?

Scenario 2 - returns are taxed

$1 will compound at 100% + 30% taxation and grow to a measly $40,642 in 20 years.

Lesson? Get your taxes under control before you start focusing on growing your money.