LEAP SYSTEMS, Inc. has studied compound interest for over 22 years.  In many cases to compound interest in taxable accounts can cost some consumers more money than they make in the long-run. This is because, in the long-run, the combination of income taxes, lost opportunity costs on income taxes, inflation, and estate taxes can potentially erode most or all of the money that is in the compound taxable account. In order to help protect one's assets, one can use the LEAP SYSTEM to help eliminate some or all of the costs when using a taxable compound interest strategy.

Here is a hypothetical example of how a taxable compound interest account can be eroded over the long-run:

Suppose a person deposits $50,000 into a Certificate of Deposit. Assume that the CD is guaranteed and insured and will pay 6% compounded interest for as long as the money remains in the account. Let's examine how the account works during a 30-year term. 

     As you can see above, the basic costs associated with creating $287,175 in a taxable compound interest account is a staggering $313,733.  

But there are other problems with taxable compound interest accounts:

    First, the income taxes were paid out-of-pocket. Therefore, there is also a loss of what those tax payments could have been worth in 30 years had they been invested. At a 6% net earnings rate, that costs the individual another $111,896. The compound interest account holder could even move into a higher tax bracket costing him even more money over the entire term period. However, because these income taxes are paid over time, they are paid with cheaper dollars due to inflation. Given a 3% inflation rate, an inflation credit of $121,581 is applied.

    Second, if the client dies with the account, it may be included in his estate and subject to possible estate tax erosion.

   Third, at anytime the taxable compound account could be subject to a creditor due to a lawsuit.

   Fourth, there are no benefits on these accounts for death or disability. The family would only receive what is in the account at the time and not any additional proceeds for the unfortunate event. 

One must carefully assess the amount of time they will compound interest in taxable accounts and consider the impact of taxation and inflation on these accounts in order to make appropriate financial decisions.