Albert Einstein is often credited with calling compound interest the “8th Wonder of the World.” If that is indeed the case, then I propose that after-tax returns be called the “9th Wonder of the World.”

After all, it is not what you make – it is what you keep. By implementing smart saving, investing and withdrawal strategies, you can make the most of your hard-earned dollars.

Identical Returns with Drastic Differences

When it comes to taxes, distributions and your tax bracket are not the only factors to consider. It’s also important to understand the nuances of interest income, capital gains and dividends.

Consider two hedge funds with different investment approaches. Fund A focuses on investing both long and short in stocks, while fund B targets credit-oriented securities. At one point, both funds generated nearly identical 12% annualized returns over their first decade of operation. However, the results were drastically different for a taxable investor. Why? Because of the composition of those returns.

Fund A does not trade frequently, but aggressively harvests minor losses while usually holding core positions for years. That means it generates fewer taxable capital gains for investors along the way. Compare that to fund B, which invests in credit and tends to trade more often, generating a significant portion of returns through short-term capital gains or interest income. Interest income and short-term capital gains are considered “ordinary income” and are generally subject to your highest ordinary income tax rate, instead of favorable dividend or long-term capital gains tax rates.

In this real-world example, after a decade of operation fund A only paid $1 in tax for every $100 earned due to the intense after-tax focus, while fund B was much closer to $50 for every $100 of earnings. That means the 12% stated return for fund B is more akin to a 6% return for the fully taxable, top income tax bracket investor. Even a great investment can quickly turn to average if you don’t account for taxes.

Uncle Sam May Have a Claim on “Your” Account

As our example shows, you may have a large paycheck or see robust returns in your portfolio, but how much you actually take home can be misleading if taxes are an afterthought.

Imagine having a 401(k) or IRA worth $2 million. That is a great accomplishment, and by many definitions you could call yourself a multimillionaire. However, assets saved in those account types are generally subject to both state and federal income taxes when they are withdrawn.

When you contributed money to the hypothetical account, it avoided income tax. That means Uncle Sam will eventually collect the government’s share as you make withdrawals later in life. Depending on your tax bracket, that $2 million could be 20% to 30% lower in terms of spendable dollars after taxes.

Some investors may conclude, “I don’t want this ongoing tax burden, so I’m going to take it all out at once so I know exactly how much I’ll have after taxes.” Unfortunately, taking out your entire balance at once could push you into the highest tax bracket, possibly resulting in upwards of 40% to 50% of your assets going to federal and state taxes.

What This Means for You

For individual investors, this highlights the importance of structuring your savings, investments and withdrawals based on a long-term strategy that incorporates a tax-savvy approach. At Bell Bank Wealth Management, we can help you navigate tax implications and create a plan that works for you.

There is a famous saying that “death and taxes” are the only certainties in life. But investors who take an after-tax mindset might be able to say that the only certainties are death – and some taxes.

This article was published in the Q2 2026 issue of the Bell Wealth newsletter.