April 15. Time again for our annual quest to uncover that big tax-break lurking somewhere on our tax return. It’s certainly been elusive. Could it be possible that, for typical taxpayers like us, the really big break just isn’t there?

Taxes, like death, are just one of life’s certainties. Another certainty — the more we make, the more they take. This year, joint filers earning $75,000 will pay almost $12,000. Couples earning $150,000 will pay over $31,000. And, the tax rate just keeps going up until it reaches 35 percent on earnings over $336,550. 

Deductions help by reducing the amount on which we’re taxed. A $10,000 deduction shrinks taxable joint income of $100,000 to $90,000, lowering tax from $18,000 to $15,500. Unless earmarked and invested, though, this savings is often soon forgotten. And, as income rises, deductions begin to disappear. The benefits of mortgage interest and property tax start fading at joint income of $150,000. The more we make, the less we can deduct.

Cheer up. We have big tax-breaks. They’re not hiding, but right in front of us… beckoning. It seems Uncle Sam wants our kids to attend college and prefers we support ourselves in old age. So, special accounts exist to protect our college and retirement earnings from that annual tax hit. The 401(k) and IRA protect retirement, and the 529 and Coverdell shield college savings.

In all these accounts, earnings grow without being taxed every year. In some accounts, earnings are taxed when withdrawn and considered “tax-deferred.” In others, earnings are withdrawn truly “tax-free.” But, in either type of account, the annual return will always be higher than in an account where earnings are taxed annually.

Taxation simply lowers our return. By how much depends on the tax rate. An annual 10 percent yield drops to 8.5 if earnings are taxed at 15 percent and 7.2 if they are taxed at 28 percent. To keep the 10 percent, we’ve got to avoid the tax by keeping our money in these protected accounts until retirement or college rolls around. Taking it out at the wrong time or for the wrong reasons means big penalties.

It’s worth it because, let me tell you, higher returns grow our money a lot faster. Inside a 529 college plan, our $150-a-month investment growing non-taxed at 10 percent gets to $90,000 in 18 years. Outside a 529, it reaches just $77,000 if taxed at 15 percent and $67,000 at 28 percent. And, 529 earnings are completely tax-free if withdrawn for education.

Let’s talk longer term growth. That same $150 growing for 40 years in a 401(k) reaches over $875,000 at 10 percent. It gets to only $577,000 if taxed at 15 percent and $405,000 at 28 percent. Also, money set aside in a 401(k) is treated like a deduction to lower taxes now. While 401(k) money is taxed as withdrawn, the less we withdraw, the less tax we’ll pay. The less we make, the less they take…

Non-taxed growth is a difference that can make all the difference. It puts college and retirement goals directly within our reach. To grab hold, all we’ve got to do is save.  

What’s up next? Navigating Tax-Protected Growth Accounts  Berry is not a Certified Financial Planner. She is the self-taught manager of her own family’s finances and a cum laude graduate of Texas Tech Law School. Before making any financial decisions, evaluate all information carefully and consider consulting a financial professional. Source: Mike Busch, CPA, CFP; President, Vogel Financial Advisors, LLC. All figures are approximate.