How Taxes Reduce Compound Growth
When taxes are applied to investment gains annually, they reduce the amount that continues compounding. This "tax drag" compounds over time, creating an ever-growing gap between pre-tax and after-tax returns. A 7% return taxed at 25% annually doesn't simply become 5.25% — the effective after-tax return is lower because of lost compounding.
Tax-Advantaged Accounts
Tax-deferred accounts (401k, Traditional IRA) let your full returns compound without annual tax drag. Roth accounts (Roth IRA, Roth 401k) provide tax-free growth. Both dramatically outperform taxable accounts over long periods.