The Power of Tax Deferral

Chart of the Week for June 1-7, 2001

The above chart illustrates the power of tax deferred investing. As you can see, saving through a tax deferred program results in a significantly larger balance than does saving through a taxable program. Although taxes will need to be paid at the time of withdrawal from a tax deferred account (Uncle Sam won’t wait forever!), retirees are typically in a lower tax bracket and remaining retirement funds continue to grow tax deferred until withdrawn.

The new tax bill significantly increases the maximum contribution participants may make to tax deferred investment vehicles. Over the next five years, the maximum contribution to a 457 plan increases from $8,500 to $15,000; the catch-up limit doubles over that same time period from $15,000 to $30,000.

To learn more about the Economic Growth and Reconciliation Act of 2001, access ICMA-RC ’s Legislative Action Center.

Methodology: Assumed an annual contribution of $2000. The rates of return used above are based on domestic equity funds with at least 15 years of history through April 2001. Specialty Funds were excluded from the universe. The tax deferred return of 11.85% is the average of the 15 year annualized return; the average tax-adjusted return calculated by Morningstar for these funds is 9.11%.

Morningstar defines its after tax return as follows: “…all income and short-term capital-gains distributions are taxed at the maximum federal rate of 39.6% at the time of distribution. Long-term capital gains are taxed at a 20% rate. The after-tax portion is then reinvested in the fund. State and local taxes are ignored, and only the capital gains are adjusted for tax-exempt funds, as the income from these funds in nontaxable.”

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

Investment information can change rapidly and the changes can be significant particularly in volatile markets. For this reason “as of”’ dates are provided for specific data where applicable. The information should not be considered current after the dates provided.

Please read both the current applicable prospectus and MAKING SOUND INVESTMENT DECISIONS: A Retirement Investment Guide carefully for a complete summary of all fees, expenses, charges, financial highlights, investment objectives, risks and performance information. Investing in mutual funds and other investment vehicles involves risk, including possible loss of the amount invested. Investors should carefully consider the Fund's investment objectives, risks, charges and expenses before investing or sending money. The prospectus contains this and other information about the investment company. The Vantagepoint Funds are distributed by ICMA-RC Services LLC, a wholly owned broker-dealer subsidiary of ICMA-RC and member FINRA/SIPC. For a current prospectus, contact ICMA-RC Services, LLC.

The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment returns and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data illustrated. For performance data current to the most recent month end, contact ICMA-RC Services, LLC by calling 800-669-7400 or by writing to 777 North Capitol Street, NE, Washington, DC 20002-4240. Para asistencia en Español llame al 800-669-8216. Performance data current to the most recent quarter end is available by visiting www.icmarc.org.