Tax-Free Growth
IntermediateTax-free growth means investment returns, such as interest, dividends and capital gains, that are never taxed, as long as the account's rules are followed.
Some accounts let investments grow without tax being charged on the returns, either while the money is invested or when it is withdrawn. Examples include Roth individual retirement accounts in the United States, individual savings accounts (ISAs) in the United Kingdom and tax-free savings accounts in Canada.
Tax-free growth differs from tax-deferred growth. With tax-deferred growth, tax is postponed until withdrawal. With tax-free growth, it is never paid, although contributions are often made from income that has already been taxed.
For example, 10,000 invested in a tax-free account growing at 7% a year would grow to about 54,300 after 25 years, and all of it could be withdrawn without tax. In a taxable account, tax on income and gains along the way would leave less.
These accounts usually have annual contribution limits and rules about who can use them and when money can be withdrawn. Breaking the rules can lead to tax and penalties.
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