| Author |
Message |
Brablo
Guest
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 Posted:
Wed Nov 09, 2005 1:00 am Post subject:
Owning stocks inside/outside a tax-deferred vehicle (tdv) |
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Suppose that I have $10,000 in stocks.
Case 1. Suppose I put this $4K in a IRA, which is an example of a TDV.
Every year, this investment happens to grow at about 15% a year. 10
years later, this portfolio is now worth ~$16.2K. I only get taxed on
it as income taxes (assuming that I'm over 59.5 years of age) when I
withdraw. I don't know what income bracket I'll be in, but my marginal
rate can be as high as 35%.
Case 2: This same $4K is placed OUTSIDE an IRA. It grows at 15% for
the next 10 years. Since I didn't sell it during this 10 year time, I
am not going to have to pay short/long term capital gains. It's only
when I cash out do I have to pay a long-term capital gain tax, which
these days is only 10%.
Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
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Dr Tormento
Guest
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| Posted:
Wed Nov 09, 2005 1:00 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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"Brablo" <gestureofrespect@yahoo.com> wrote in
news:1131486966.511596.283360@o13g2000cwo.googlegroups.com:
| Quote: | Suppose that I have $10,000 in stocks.
Case 1. Suppose I put this $4K in a IRA, which is an example of a TDV.
Every year, this investment happens to grow at about 15% a year. 10
years later, this portfolio is now worth ~$16.2K. I only get taxed on
it as income taxes (assuming that I'm over 59.5 years of age) when I
withdraw. I don't know what income bracket I'll be in, but my marginal
rate can be as high as 35%.
Case 2: This same $4K is placed OUTSIDE an IRA. It grows at 15% for
the next 10 years. Since I didn't sell it during this 10 year time, I
am not going to have to pay short/long term capital gains. It's only
when I cash out do I have to pay a long-term capital gain tax, which
these days is only 10%.
Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
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The capital gains tax for most taxpayers is 15%.
But yes, you are correct that it makes more sense to keep long term
capital gain investments outside an IRA. Most advisers recommend you use
the IRA for the interest generating portion of your portfolio. |
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PeterL
Guest
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| Posted:
Wed Nov 09, 2005 1:00 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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Brablo wrote:
| Quote: | Suppose that I have $10,000 in stocks.
Case 1. Suppose I put this $4K in a IRA, which is an example of a TDV.
Every year, this investment happens to grow at about 15% a year. 10
years later, this portfolio is now worth ~$16.2K. I only get taxed on
it as income taxes (assuming that I'm over 59.5 years of age) when I
withdraw. I don't know what income bracket I'll be in, but my marginal
rate can be as high as 35%.
Case 2: This same $4K is placed OUTSIDE an IRA. It grows at 15% for
the next 10 years. Since I didn't sell it during this 10 year time, I
am not going to have to pay short/long term capital gains. It's only
when I cash out do I have to pay a long-term capital gain tax, which
these days is only 10%.
Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
|
You have a lot of assumptions going forward, which may or may not come
to fruition. For example, you are assuming that there are stocks you'd
hold for 30 years and these stocks would appreciate 15% per year.
Those are quite generous assumptions.
You are also missing the point that you invest pre-tax dollars vs post
tax dollars.
That said, you are correct that there are instruments you should hold
in tax advantaged accounts, and there are those that you should hold
outside of those accounts.
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ynotssor
Guest
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| Posted:
Wed Nov 09, 2005 1:01 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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"Brablo" <gestureofrespect@yahoo.com> wrote in message
news:1131486966.511596.283360@o13g2000cwo.googlegroups.com...
| Quote: | Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
|
Look into a Roth IRA. |
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Brablo
Guest
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| Posted:
Wed Nov 09, 2005 1:01 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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One other thing that I've failed to mention is that I'm familiar with
the taxations of the money. In Case 1, the money can be pre-taxed
(assuming eligibility for this feature). Case 2 is always funded with
after tax-money.
Assume Case 1 is for a 401K, which is funded with pre-tax money. How
is this case better than case 2 from a taxation point of view? |
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ynotssor
Guest
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| Posted:
Wed Nov 09, 2005 1:01 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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"Brablo" <gestureofrespect@yahoo.com> wrote in message
news:1131488738.352432.8480@z14g2000cwz.googlegroups.com...
| Quote: | Assume Case 1 is for a 401K, which is funded with pre-tax money. How
is this case better than case 2 from a taxation point of view?
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Again, look into a Roth IRA. |
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Eddie Grove
Guest
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| Posted:
Wed Nov 09, 2005 1:01 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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"Brablo" <gestureofrespect@yahoo.com> writes:
| Quote: | Suppose that I have $10,000 in stocks.
Case 1. Suppose I put this $4K in a IRA, which is an example of a TDV.
Every year, this investment happens to grow at about 15% a year. 10
years later, this portfolio is now worth ~$16.2K. I only get taxed on
it as income taxes (assuming that I'm over 59.5 years of age) when I
withdraw. I don't know what income bracket I'll be in, but my marginal
rate can be as high as 35%.
Case 2: This same $4K is placed OUTSIDE an IRA. It grows at 15% for
the next 10 years. Since I didn't sell it during this 10 year time, I
am not going to have to pay short/long term capital gains. It's only
when I cash out do I have to pay a long-term capital gain tax, which
these days is only 10%.
Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
|
You are missing 2 things.
(a) The $4K you put into the deferred vehicle is deducted from your
current income. If you keep it out, you have to pay current taxes of,
say, 35% [fed + state + soc-sec + ...], so you should be comparing it
to only $2.6K outside the IRA.
(b) If you buy a mutual fund, even though you don't sell the fund, if
the managers are buying and selling [most funds average 100% turnover]
they have to declare the gains as "distributions", and you have to pay
current tax on the distributions. The only way to guarantee what you
want is to buy individual stocks and hold them personally. Even then,
10 years is too long -- you will surely change your mind on some of
your specific picks in a year or three.
Eddie |
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Don S
Guest
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| Posted:
Wed Nov 09, 2005 1:01 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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Brablo wrote:
| Quote: | Suppose that I have $10,000 in stocks.
Case 1. Suppose I put this $4K in a IRA, which is an example of a TDV.
Every year, this investment happens to grow at about 15% a year. 10
years later, this portfolio is now worth ~$16.2K. I only get taxed on
it as income taxes (assuming that I'm over 59.5 years of age) when I
withdraw. I don't know what income bracket I'll be in, but my marginal
rate can be as high as 35%.
Case 2: This same $4K is placed OUTSIDE an IRA. It grows at 15% for
the next 10 years. Since I didn't sell it during this 10 year time, I
am not going to have to pay short/long term capital gains. It's only
when I cash out do I have to pay a long-term capital gain tax, which
these days is only 10%.
Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
You can sell and buy something else without paying taxes until you |
withdraw, so if you are changing your investments to capture advances
then you would be better off in an IRA. |
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Alan Bowler
Guest
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| Posted:
Wed Nov 09, 2005 1:01 am Post subject:
Re: Owning stocks inside/outside a tax-deferred vehicle (tdv |
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Brablo wrote:
| Quote: | Suppose that I have $10,000 in stocks.
Case 1. Suppose I put this $4K in a IRA, which is an example of a TDV.
Every year, this investment happens to grow at about 15% a year. 10
years later, this portfolio is now worth ~$16.2K. I only get taxed on
it as income taxes (assuming that I'm over 59.5 years of age) when I
withdraw. I don't know what income bracket I'll be in, but my marginal
rate can be as high as 35%.
Case 2: This same $4K is placed OUTSIDE an IRA. It grows at 15% for
the next 10 years. Since I didn't sell it during this 10 year time, I
am not going to have to pay short/long term capital gains. It's only
when I cash out do I have to pay a long-term capital gain tax, which
these days is only 10%.
Am I missing something here, because it sounds like owning investments
*outside* an IRA/401K is a more logical thing to do in terms of
avoiding taxes.
|
You are missing two things
1) What goes into the IRA (non-Roth) is before tax money, so in case #2
you only have $2600 (i.e. 4k - 35%) to invest. The $1400 difference
grows inside an IRA, but outside it is just gone.
2) No sane person gambles their retirement funds entirely on an
investment that he expects to pay 15% entirely in capital gains
only at the end of 10 years. Stocks with 15% growth and no dividends
are risky and tend to implode. The incentive is for the management
to play games and cash out before 10 years.
Even if all is above board, the goal of many of these growth stories
is to get big enough that they get bought out for cash (taxable).
Any reasonable retirement portfolio is going to have a mix of
assets (bonds, CDs, dividend paying stocks, non-dividend stocks ...)
that will generate taxable income over 10 years (interest, dividends
capital gains from buyouts.) Even an index fund (including
ETFs) investment will generate taxable annual capital gains
distributions that will reduce the compound growth outside
an IRA.
Longer term, the return from stocks is well below 15%.
and 1/2 the real return is in dividends.
As someone else pointed out, you should look a a Roth IRA.
Be warned however, that they may well be too good to last.
Essentially, the Roth structure is allowing the government
to borrow from what would have been future tax revenues without
having to account for it as a debt. The effective interest
rate is much higher than other government debt.
The current administration has spent 5 years pounding
its chest and saying "Honouring commitments is for wimps.
We don't feel like doing it." The Chinese have started to
get wary of buying more US government debt. In 10 years,
if (admittedly a big "if") they are instead demanding that
their maturing bonds be paid off, will the US government
honour its commitment not to tax Roth withdrawls? |
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