Compound Interest in the US — 401(k), Roth IRA, and Index Funds

## Tax-advantaged compounding The best compound interest in the US comes from tax-advantaged accounts: **401(k)**: Pre-tax contributions reduce your taxable income now, compounding happens tax-deferred. You pay taxes when you withdraw in retirement — ideally at a lower bracket. **Roth IRA**: After-tax contributions, but all growth and withdrawals are tax-free. For a young investor, this is often the best compounding vehicle because you never pay taxes on the gains. ## The index fund advantage S&P 500 index funds have returned ~10% annually over long periods. A $10,000 investment at age 25 becomes approximately $174,000 by age 65 — a 17x multiple with no active management fees eating your returns. ## Expense ratios kill compounding A 1% annual expense ratio on a fund reduces a $100,000 investment's 30-year growth by approximately $140,000 vs a 0% expense ratio fund. Vanguard and Fidelity index funds have expense ratios as low as 0.03%.