Question about re-investing returns...

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Afterwards Hilarity Ensued

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Nov 26, 2006, 5:35:57 PM11/26/06
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How damaging or costly is it if somebody doesn't reinvest returns realised
thru tax shelter investments?

For Example I invest far below my allotted cap room inside my RRSP's (that's
like an IRA or Roth or something like that for Americans)

However any money that I do invest inside this tax shelter will lower my
taxable income so I should be getting about 30% of what I invest in that
retirement plan this year at income tax refund time next spring.

However I only allocate 25% of my total monthly savings/investment funds in
the tax free retirement plan shelter. This money is invested in Mutual
funds (20% aggressive growth, 50% moderate growth, 30% safe growth) The
other 75% is invested outside tax shelters or in simple 30 day deposit
certificates and mutual funds. I do this for now because I am still
building savings accounts for emergency funds, and big ticket life
purchases. Sure I pay the taxes on the returns but then the funds are free
and clear to spend. With a tax sheltered retirement I never plan on
touching it until I retire.

I had planned on using my tax return to re-invest outside of my tax free
growth investments because those will be more pressing needs but would this
be a costly mistake in building a retirement portfolio? in other words
should I re-invest the tax returns realized from retirement investing into
that same plan? What would be the long term cost to my retirement
portfolio?

This is my first year of investing so It's all new to me. Keep in mind I
won't be spending my tax return rather deciding how to reinvest.

Here are my facts:

-30 so retirementis in say 30 years give or take a few years
-Single
-Rent
-will not buy home until married or for another 5 years
-NO debts (credit cards, cars, lines of credit, family etc. I owe nothing!)
-NO university debts (high school drop-out)
-blue collar income
-currently have 6 months pay saved but will want this at 12 months
-first year of my adult life with a savings account and investments.
-Saving/ investing approx 50% of my after tax income each and every month
-no additional contributions from employer, government, family. All money
is from my pocket.

po....@gmail.com

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Nov 27, 2006, 3:32:28 PM11/27/06
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Afterwards Hilarity Ensued wrote:
> How damaging or costly is it if somebody doesn't reinvest returns realised
> thru tax shelter investments?
>
> For Example I invest far below my allotted cap room inside my RRSP's (that's
> like an IRA or Roth or something like that for Americans)
>

That would be a Canadian system right?

> However any money that I do invest inside this tax shelter will lower my
> taxable income so I should be getting about 30% of what I invest in that
> retirement plan this year at income tax refund time next spring.
>
>

> I had planned on using my tax return to re-invest outside of my tax free
> growth investments because those will be more pressing needs but would this
> be a costly mistake in building a retirement portfolio? in other words
> should I re-invest the tax returns realized from retirement investing into
> that same plan? What would be the long term cost to my retirement
> portfolio?

It's impossible to calculate what the long term cost would be. If you
are maxing out your RRSP's then any future realized tax advantages
cannot be invested further into the RRSP, right? (Cause you are already
maxed out.) Otherwise any slack you left would be so much less for
your future retirement.

>
> This is my first year of investing so It's all new to me. Keep in mind I
> won't be spending my tax return rather deciding how to reinvest.

Your investment in RRSP grows tax deferred. Investment outside the
RRSP you'll have to pay tax on annually.

Bucky

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Nov 27, 2006, 5:30:14 PM11/27/06
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Afterwards Hilarity Ensued wrote:
> How damaging or costly is it if somebody doesn't reinvest returns realised
> thru tax shelter investments?

It took me a while to understand your question because the phrasing
made it sound like you were asking about re-investing dividends and
distributions. But if I understand correctly, you're really asking
about investing the tax refund/credit.

I don't know the details of Canadian tax system, but if it's the same
as U.S., then you're not getting a tax refund, you actually never had
to pay it in the first place. (The ideal thing to do is to adjust your
tax witholding so that you pay less taxes by the same amount, instead
of waiting to get the refund the next year.)

Since you say your tax bracket is 30%, that means that you will earn
roughly (very roughly) 30% less outside the RRSP. So if you could earn
10% annually in the RRSP, it would only be about 7% outside RRSP. With
compounding, that can become a huge difference over decades (2x over 20
years).

Afterwards Hilarity Ensued

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Nov 27, 2006, 7:12:04 PM11/27/06
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<po....@gmail.com> wrote in message
news:1164659519.7...@l39g2000cwd.googlegroups.com...

>
> Afterwards Hilarity Ensued wrote:
>
> It's impossible to calculate what the long term cost would be. If you
> are maxing out your RRSP's then any future realized tax advantages
> cannot be invested further into the RRSP, right? (Cause you are already
> maxed out.) Otherwise any slack you left would be so much less for
> your future retirement.

That is right. Anyt ax advantages I would get cannot be used to put into
the RRSP unless I did not max out. Fornately, or unfortunatley, I have 6
years worth of unused contribution space that I am allowed to carry forward
into the current tax year so in my case I would be allowed to reinvest my
tax refund.

>
>>
>> This is my first year of investing so It's all new to me. Keep in mind I
>> won't be spending my tax return rather deciding how to reinvest.
>
> Your investment in RRSP grows tax deferred. Investment outside the
> RRSP you'll have to pay tax on annually.

But do I put all my energy and found money into retirement funding i.e.
RRSP's? Should I be maxing out and putting everything into that tax
deferred investment when I'm 30? Am I supposed to top that fund up first
before anything else?

Keep in mind I have NO DEBTS or credit card balances or car loans etc. I
owe nobody a single cent, expect the landlord and the tax people.

joetaxpayer

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Nov 27, 2006, 8:04:00 PM11/27/06
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Afterwards Hilarity Ensued wrote:

>
> But do I put all my energy and found money into retirement funding i.e.
> RRSP's? Should I be maxing out and putting everything into that tax
> deferred investment when I'm 30? Am I supposed to top that fund up first
> before anything else?
>
> Keep in mind I have NO DEBTS or credit card balances or car loans etc. I
> owe nobody a single cent, expect the landlord and the tax people.
>

In the US, the tax rates are graduated, so that an individual pays 15%
for taxable income over $7550, but 25% for income over $30,650, and
ultimately, 35% for income over $336,550.

We run the risk of over saving in tax deferred accounts and then paying
too much tax at withdrawal. And some other oddities when social security
income is added. So the answer in the US is to deposit enough in our
employer account (here, a 401k account) to capture the matching funds
given by the employer. Then, other savings, post tax.

Not knowing the specifics of the Canada tax code, I'll leave the further
comment to someone more familiar with it.
JOE

Afterwards Hilarity Ensued

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Nov 28, 2006, 5:00:12 AM11/28/06
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"joetaxpayer" <joeta...@nospam.com> wrote in message
news:aJOdnW4KRadFF_bY...@comcast.com...

The people in misc.can.invest and can.general know little of financial
planning and know far more about buying penny stocks. I am slowly but
surely learning Canada's tax codes from google every day!!!!!

In Canada we have 3 or 4 federal tax brackets. Also the provinces have
their own tax brackets. The first tax bracket is for income from $1 to $36
500 per year and this rate is $15.25% for 2006
The second bracket is 22% and applies to income between 36 500 and 78 500.
So if you made $75 000 you are taxed 15.25% of the first 36 500 and then 22%
for the remainder. In my province of Ontario the income tax is 6% for the
first 34 000 and 9% for the amount between 34000 and 68000 and 11% on the
amount after $68 000.

So In Canada at least people try try try to get themselves into that lower
tax bracket by reducing taxable income. Invest in tax deferred retirement
schemes is the easiest way to do this and if you get into that lowest
bracket you are looking at some nice refunds.

However alot of people borrow short term money to put into those investment
shelters and then they take their refund and pay back the loan or a portion
of the loan.

However Joe you raised a good point. I picked moderately aggressive growth
funds. If these funds have a couple stellar years I could run the risk of
getting into a HIGHER tax bracket come time to withdrawal from my retirement
tax deferred investments. So maxing out tax deferred contributions could be
a negative in the future, esp. if I am scheming to save taxes now in my
youth. Since my employer offers no pension or matching contributions I
felt I'd have to work twice as hard to give to my plan. But what if my
investments did really well in that shelter? I could be saving my way to
higher taxes. I would be robbing myself from the past.

So only max out IF your employer matches (that's free money).

I'm glad you raised that point. Since I have a 30 year plan there is real
risk of oversaving. I have to read the tax code rules (like they will be
the same 30 years from now LOL) and find out what the MAXIMUM withdrawal I
can make from these tax deferred investments once I am retired and convert
the plan into income. IF there is no max then it could be tax trouble down
the road. If there are Maximums on withdrawls maybe I won't pay alot of
tax on any potential oversavings.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

joetaxpayer

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Nov 28, 2006, 7:58:03 AM11/28/06
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Afterwards Hilarity Ensued wrote:

> If these funds have a couple stellar years I could run the risk of
> getting into a HIGHER tax bracket come time to withdrawal from my retirement
> tax deferred investments. So maxing out tax deferred contributions could be
> a negative in the future, esp. if I am scheming to save taxes now in my
> youth. Since my employer offers no pension or matching contributions I
> felt I'd have to work twice as hard to give to my plan. But what if my
> investments did really well in that shelter? I could be saving my way to
> higher taxes. I would be robbing myself from the past.

And so the advice I've come to offer here, to reasonable acceptance, is
that one should diversify across their taxable/ non taxable accounts as
well [as diversifying amongst asset classes]. So at retirement you stand
a chance of controlling to some degree where the income will come from
and be able to moderate your tax burden a bit.
In the states, we also have the issue that our 401k withdrawal is
'ordinary income' and taxed at one's higher, marginal rate. Post tax
money giving off dividends and/or long term gains are taxed at a
favorable 15% maximum rate. So, money put in pre-tax, not matched, can
cost the investor more in the long term.
It looks like the Canadian structure is similar, in that sense.
JOE

anoop

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Nov 28, 2006, 12:53:49 PM11/28/06
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joetaxpayer wrote:

> We run the risk of over saving in tax deferred accounts and then paying
> too much tax at withdrawal. And some other oddities when social security
> income is added. So the answer in the US is to deposit enough in our
> employer account (here, a 401k account) to capture the matching funds
> given by the employer. Then, other savings, post tax.

Is this really true? I thought the general consensus was to get the
employer match, then do the Roth (where you invest post tax but the
gains are tax free) and then again go back to the traditional plan and
max out. I haven't seen anything that says to get the employer match
and then look to post-tax saving. If the employer didn't match
anything, the above logic would imply that all savings should be
post-tax.

Also, I think the advice would vary on income level. For someone
with very high income, it probably doesn't hurt to save as much as they
can in tax-deferred accounts.

Anoop

joetaxpayer

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Nov 28, 2006, 1:46:37 PM11/28/06
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anoop wrote:

> joetaxpayer wrote:
>
>
>>We run the risk of over saving in tax deferred accounts and then paying
>>too much tax at withdrawal. And some other oddities when social security
>>income is added. So the answer in the US is to deposit enough in our
>>employer account (here, a 401k account) to capture the matching funds
>>given by the employer. Then, other savings, post tax.
>
>
> Is this really true? I thought the general consensus was to get the
> employer match, then do the Roth (where you invest post tax but the
> gains are tax free) and then again go back to the traditional plan and
> max out. I haven't seen anything that says to get the employer match
> and then look to post-tax saving. If the employer didn't match
> anything, the above logic would imply that all savings should be
> post-tax.

Yes, the advice would vary based on income. Also - I was replying to a
Canadian poster, I don't know if a Roth type vehicle was available to
him. Matched 401, then Roth or post tax IRA deposit with an eye toward
Roth conversion. Side by side, a non-matched 401 vs post tax accounts
are not quite a no brainer, but I've written spreadsheets that show that
even with the tax deduction up front, the loss at the same rate upon
withdrawal is a hit. The post tax savings enjoy a lower tax rate for
Dividends or long term gains. So I do believe the 401k needs to be
scrutinized a bit when deciding how heavy to invest. For example, a 50
year old who now needs to save as much as he can for retirement with
little saved. He may easily go from a high bracket to the 15% bracket at
retirement. 401 to the max. A young person with good prospects starting
out in the 15% bracket probably shouldn't save in the 401 beyond the
match. For her, the Roth is the best way to go.

JOE

w...@talisys.com

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Nov 28, 2006, 2:16:47 PM11/28/06
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Let's take a step back -- try not to let the fear of taxes blind us to
the actual numbers.

Here's a question. Would you prefer to pay $10,000 per year in taxes or
$1,000,000 per year in taxes? For myself, a no brainer. I'd pay the $1M
because that means my income is $2M versus paying $10K of taxes on $30K
of income.

Getting back to your situation, the money you put in now grows
tax-deferred. So let's run some simple numbers to see what happens. Say
you put in $10K a year post tax versus $13.3K pre tax @ 10% growth,
100% distributions, 25% tax rate now and future. Here are the cash-out
schedule for years 1-10.

Year 1: 10,000 post tax versus 10,000 tax deferred cashout
2: 20,750 - 21,000
3: 32,306 - 33,100
4: 44,729 - 46,410
5: 58,084 - 61,051
6: 72,440 - 77,156
7: 87,873 - 94,872
8: 104,464 - 114,359
9: 122,298 - 135,795
10: 141,471 - 159,374
20: 433,037 - 572,750
30: 1,033,994 - 1,644,940

After 10 years, you're talking 12%+ for tax defered over a fully
taxable account. Keep running the numbers and you see 32% after 20
years. After 30 years, it's 59%. So that extra 59% might be taxed at a
higher bracket. Go back to my hypothetical question about how much
taxes you'd rather pay. That still leaves you with a higher post-tax
amount assuming you took everything out at once. (You do have the
option of taking out X amount every year to stay within some arbitrary
tax bracket.)

Now it is more complicated than this. Using low turnover index funds
will reduce the yearly tax drag for taxable accounts. Capital
gains/qualified dividends may or may not be taxed better depending on
the political climate. Global/national economic picture might be
different forcing higher taxes all around. But I'd certainly plan for
overinvesting versus underinvesting.

joetaxpayer

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Nov 28, 2006, 4:01:46 PM11/28/06
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w...@talisys.com wrote:

> Let's take a step back -- try not to let the fear of taxes blind us to
> the actual numbers.
>
> Here's a question. Would you prefer to pay $10,000 per year in taxes or
> $1,000,000 per year in taxes? For myself, a no brainer. I'd pay the $1M
> because that means my income is $2M versus paying $10K of taxes on $30K
> of income.
>
> Getting back to your situation, the money you put in now grows
> tax-deferred. So let's run some simple numbers to see what happens. Say
> you put in $10K a year post tax versus $13.3K pre tax @ 10% growth,
> 100% distributions, 25% tax rate now and future. Here are the cash-out
> schedule for years 1-10.

Your math is compelling, but makes some assumptions that may be right or
wrong. Are you assuming the 401(k) has the same expenses that the post
account funds do? In my reply to the OP, I should have pointed out that
401(k) fund expenses, good or bad, should be taken into account. Try
adjusting your calculations using .20-.40% annual incremental expenses
and the advantage fades quickly.
Also, it's been discussed here that there are phantom rates as high as
50% which hit when additional income causes Social Security to be taxed.
That situation calls for post tax money.
Lastly, consider this - in the final year one works, in the 15% bracket,
he saves in the 401(k), but in the very next year, the first year of
retirement, starts drawing enough that he's in the 25% bracket. Of
course this can work in reverse, the one year deferral saving him the
10% difference.
In the end, I didn't claim the pre-tax savings is always bad or good,
just that there's a need to be aware of the possible trap at the other
end. Given that tax laws can and do change, not putting all your eggs in
the pre-tax basket seems sound advice.
JOE

anoop

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Nov 28, 2006, 5:04:39 PM11/28/06
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joetaxpayer wrote:

>
> Yes, the advice would vary based on income.

..


> So I do believe the 401k needs to be
> scrutinized a bit when deciding how heavy to invest.

At least in the US, there are other things to keep in mind.
Most tax-deferred retirement plans are protected in case the
person gets sued and/or goes bankrupt. You also can't
make much in terms of catch-up contributions, so I think
it makes sense to take as much advantage of them while
you can. I've always thought of maxing out on the 401(k)
as a no-brainer and I've yet to see something that can
convince me otherwise.

Anoop

w...@talisys.com

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Nov 28, 2006, 7:23:07 PM11/28/06
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Obviously, things get complicated when you take in all the factors. I
already issued that caveat. My post was mostly addressing this quote
from the OP:

"But what if my investments did really well in that shelter? I could
be saving my way to higher taxes."

The statement just screams to me irrational fear of taxes. Throwing
away higher possible net-after-tax returns because the total $/% of
taxes is higher? Crazy.

Afterwards Hilarity Ensued

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Nov 29, 2006, 12:54:49 AM11/29/06
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<w...@talisys.com> wrote in message
news:1164754666.9...@l12g2000cwl.googlegroups.com...

> Obviously, things get complicated when you take in all the factors. I
> already issued that caveat. My post was mostly addressing this quote
> from the OP:
>
> "But what if my investments did really well in that shelter? I could
> be saving my way to higher taxes."
>
> The statement just screams to me irrational fear of taxes. Throwing
> away higher possible net-after-tax returns because the total $/% of
> taxes is higher? Crazy.

Well I was the OP and the whole question thread started about what to do
with my tax refund that was given to me specifically because I invested in a
tax deffered plan. I also as the OP said this was my first year of
investing so I have some pretty silly question I'm sure. But shouldn't
careful consideration of taxes be a factor to those of us who are blue
collar worker types?

w...@talisys.com

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Nov 29, 2006, 4:17:06 AM11/29/06
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Refer back to the numbers in my first reply. You absolutely will pay
way more in taxes over the long run if your money is in the tax
deferred account. 225K+ more for the 30 year example! Seems crazy that
paying nearly a quarter of a million more in taxes could ever be
beneficial. But the key is that tax deferred investments grow a lot
faster than investments taxed every year (assuming
expenses/returns/options are equal). The reason you pay $$$ more is
because tax deferral allowed your investments to grow an extra 1.1M --
575K of that is yours after tax. (Taxable: earn 1.333M, tax 333K, net
1M versus Tax-deferred: earn 2.1M, tax 525K, net 1.575M.) The point
here is to look at the net return numbers. If you pay more in tax but
you still take home more money, that's better than paying less in taxes
because you take home less net.

Previous messages have stated there's no guarantee that tax laws will
not change. Maybe you will be in a much higher bracket. And maybe the
world will be in a global depression where taxes have to be raised
massively. (And likewise, there's no guarantee the favorable tax status
of LTCG and QDIV will remain in place either.) Let's calculate what
your margin for increase is in the 30 year example. 1-(1/2.1) --> 53%.
Your overall tax rate (not the top marginal bracket) can go as high as
53% and still match the performance of the fully-taxed account that was
taxed at 25% every year. A jump from 25% to 53% the year you happen to
retire won't happen (unless you decide to cash the entire thing out to
buy an island versus taking 5% out every year for your living expenses)
-- the entire country would revolt. If the tax was slowly increased
over time, that would also severely reduce the performance of your
taxable accounts.

Previously, I used a very simple example to illustrate the benefits of
tax-deferred growth. Let's throw in low-turnover index funds using 1%
taxable distributions+9% unrealized gains per year. (1% is being extra
favorable since the typical equity fund yield is ~2% with 5%+ for bonds
and REITs.) Assume you can invest in the same index funds in a
tax-deferred account with the same level of fees. Now we have:

10 year: net 144K versus net 159K
20 year: net 474K versus net 572K
30 year: net 1.28M versus net 1.64M

After 30 years, an extra 250K in a taxable account using index funds --
much better than actively managed funds with high volumes of
transactions. And yet still netting 360K less after all taxes versus
tax deferred growth. Your tax increase margin is now 41%. 25% to 41% --
still very improbable for a 1 year jump.

As for these numbers being applicable to blue color workers - I used a
simple $10K after-tax contribution per year as an example. If you put
$5K in per year, divide all the final numbers by 2. If you put $2500
in, divide by 4. The ratios and percentages stay the same.

Bucky

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Nov 29, 2006, 6:51:55 PM11/29/06
to
Afterwards Hilarity Ensued wrote:
> But shouldn't
> careful consideration of taxes be a factor to those of us who are blue
> collar worker types?

Definitely tax consideration is a big factor, that's why RSPP is
better. You shouldn't be afraid of earning more money on account of
paying more taxes. Keep in mind that tax brackets are marginal, you
will never be worse off hitting a higher tax bracket. The bottom line
is that the exact same investment in the RRSP will result in more money
in your pocket than outside RRSP.

joetaxpayer

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Nov 29, 2006, 8:09:12 PM11/29/06
to

One question for the OP - Do you know what the expenses are for the
funds within your RSPP? It would be expressed as a percent, say 1.2%, or
hopefully in basis points as in 25 bpts (which is .25%). This would help
the precision of the replies. Assuming the fees are low, as low as you
could find outside the account, I lean back toward this answer. If the
fees are higher, that pushes me back to my original position.

Disclaimer - the first I remarked on this I was using a spreadsheet
written for VA comparison to taxable accounts. The minimum fee of .25%
still added up over time to negate the benefit of tax deferral. The
detailed numbers wyu posted set my error straight.
JOE

zxcvbob

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Nov 30, 2006, 12:25:28 AM11/30/06
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w...@talisys.com wrote:
> Refer back to the numbers in my first reply. You absolutely will pay
> way more in taxes over the long run if your money is in the tax
> deferred account. 225K+ more for the 30 year example! Seems crazy that
> paying nearly a quarter of a million more in taxes could ever be
> beneficial. But the key is that tax deferred investments grow a lot
> faster than investments taxed every year (assuming
> expenses/returns/options are equal). The reason you pay $$$ more is
> because tax deferral allowed your investments to grow an extra 1.1M --
> 575K of that is yours after tax. (Taxable: earn 1.333M, tax 333K, net
> 1M versus Tax-deferred: earn 2.1M, tax 525K, net 1.575M.) The point
> here is to look at the net return numbers. If you pay more in tax but
> you still take home more money, that's better than paying less in taxes
> because you take home less net.
>

If you have a taxable account and you invest in stocks that you can buy
and hold forever (let's say Berkshire Hathaway, or an ETF like SPY) most
of your taxes are deferred until you sell them 30 years from now. Then,
the earnings are taxed at the long-term capital gains. Assuming capital
gains are taxed at a lower rate than ordinary income, you would be much
better off with your money in a plain old brokerage account rather than
an IRA or other tax-deferred retirement account.

My retirement money is split between a Roth IRA, a 401(k), a traditional
IRA (that I don't contribute to anymore), a margin account at a discount
broker, and some US Savings Bonds. Surely at least /one/ of them will
get favorable tax treatment when I retire.

Best regards,
Bob

w...@talisys.com

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Nov 30, 2006, 1:12:30 AM11/30/06
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I decided to google up what RSPP's are but couldn't find anything on
that acronym. However, I was able to find links for RRSP and RPP:

http://financial-dictionary.thefreedictionary.com/Registered+Retirement+Savings+Plan+-+RRSP
http://financial-dictionary.thefreedictionary.com/Registered+Pension+Plan+-+RPP

If this is what we're talking about, sounds like it works similar to
401Ks/IRAs.

In regards to using a VA spreadsheet for calculations, there's a nice
gotcha beyond extra expenses. When I popped the numbers in, I couldn't
make the year 1 numbers match up. In theory, all the different
tax/non-tax accounts should give you the same number if your cashout
time frame is 1 year (assuming all else equal). Looked at the numbers,
cocked my head about 26 degrees and then it became obvious -- pre-tax
money versus post-tax money. E.g. $10K in 401K/IRA or pay 25% tax first
leaving you $7500 for taxable/VA/non-deductible IRA. Using the post-tax
number as your contribution for both pre-tax and post-tax accounts
makes the margin so small, any extra expense can cancel out the
benefits.

Bucky

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Nov 30, 2006, 1:36:45 AM11/30/06
to
joetaxpayer wrote:
> Assuming the fees are low, as low as you
> could find outside the account, I lean back toward this answer. If the
> fees are higher, that pushes me back to my original position.

>From what I understand, the RRSP is essentially equivalent to the
Traditional IRA, funded with pre-tax dollars, then the entire amount is
taxed upon withdrawal. If that's the case, that's a huge tax savings
over non-sheltered accounts, much more than potential expense ratio
differences. If you're earning an 7% annual return with a non-sheltered
account, you could be earning 10% return with an RRSP. That's far more
than expense ratio differences.

w...@talisys.com

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Nov 30, 2006, 1:33:10 AM11/30/06
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Popping your proposed case right now into the spreadsheet. Taxable at
15%, 0% turnover. 401K/IRA at 25% tax. And we get the following numbers
after-tax:

10 years: 150K taxable versus 159K tax-deferred
20 years: 517K versus 572K
30 years: 1.44M versus 1.64M

You're probably thinking the numbers don't make sense -- there must be
something wrong with my formulas! How can you pay less tax %, have no
turnover and still come out with a lower number! I actually replied
earlier to Joetaxpayer about the slight little oversight he may have
made -- which also may have slipped your mind. Pre-tax contributions
versus post-tax contributions. You can't just use the same fixed amount
as your yearly contribution for both types of accounts. The amount you
invest in your taxable accounts, reduce by your tax bracket because you
had to pay tax on that money first. Or do the inverse, increase your
401K/IRA money using AMT/(1-tax%).

BTW, the 15% capital gains rate expires in 2011. The odds of it
renewing are low considering the budget deficit. Lots of tax cuts +
spending increases = hard to balance the budget. There's even talk
about trading the tax cuts in return for linking AMT to inflation.

Bucky

unread,
Nov 30, 2006, 2:21:03 AM11/30/06
to
zxcvbob wrote:
> If you have a taxable account and you invest in stocks that you can buy
> and hold forever (let's say Berkshire Hathaway, or an ETF like SPY) most
> of your taxes are deferred until you sell them 30 years from now. Then,
> the earnings are taxed at the long-term capital gains. Assuming capital
> gains are taxed at a lower rate than ordinary income, you would be much
> better off with your money in a plain old brokerage account rather than
> an IRA or other tax-deferred retirement account.

Wrong. Effectively, with an IRA, whether Traditional or Roth, you are
not taxed on any earnings whatsoever. With a non-sheltered account, you
are definitely taxed on earnings. If you want to debate this, let's
start a new thread and not dilute this one on RRSP.

> My retirement money is split between a Roth IRA, a 401(k), a traditional
> IRA (that I don't contribute to anymore), a margin account at a discount
> broker, and some US Savings Bonds. Surely at least /one/ of them will
> get favorable tax treatment when I retire.

That's not a bad idea, because the biggest difference will be your
current tax rate vs retirement tax rate. If you spread them out, then
you will average it out.

Afterwards Hilarity Ensued

unread,
Nov 30, 2006, 5:01:26 AM11/30/06
to

"joetaxpayer" <joeta...@nospam.com> wrote in message
news:YdednQUexJOEsvPY...@comcast.com...

>
>
> Bucky wrote:
>> Afterwards Hilarity Ensued wrote:
>>
>>>But shouldn't
>>>careful consideration of taxes be a factor to those of us who are blue
>>>collar worker types?
>>
>>
>> Definitely tax consideration is a big factor, that's why RSPP is
>> better. You shouldn't be afraid of earning more money on account of
>> paying more taxes. Keep in mind that tax brackets are marginal, you
>> will never be worse off hitting a higher tax bracket. The bottom line
>> is that the exact same investment in the RRSP will result in more money
>> in your pocket than outside RRSP.
>>
>
> One question for the OP - Do you know what the expenses are for the funds
> within your RSPP? It would be expressed as a percent, say 1.2%, or
> hopefully in basis points as in 25 bpts (which is .25%). This would help
> the precision of the replies. Assuming the fees are low, as low as you
> could find outside the account, I lean back toward this answer. If the
> fees are higher, that pushes me back to my original position.

The fees are high. In the Tax Deferred holdings I have 3 mutual funds, all
by Hartford. Hartford Funds in Canada are managed by another Mutual fund
company. I have an aggressive US mid cap growth fund, A Canadian large cap
fund that invests in dividend stock only and an income fund that is about
40% bonds (Canadian Government and Corporate bonds, 55% Canadian mixed mid
and large cap stocks (not all are dividend paying and some stocks are
actually trust companies) and 5% Term deposits.) I contribute once per
month equally to all funds. Each MER is around 1.6% although the aggressive
growth I think is lower maybe 1.2%. Past performance suggests I should get
about 6% to 8% average over the next 3 years. The aggressive fund has lost
money in the past esp. 1999 and 2000 and 2001 with steep declines but has
also gotten a couple high returns in the 14% the last few years I think.

Once I get over my fear of investing and become more aware and savvy I will
prolly take my aggressive growth moves on ishares or etfs and take advantage
of low MER's. However in Canada discount brokers do not charge commissions
or trade fee for buying or selling mutual funds I think. But It'll be a few
years before I manage my own investments. Right now I'll pay a planner his
5% in intial deposits and the fund companies their 2% in loads or whatever
it is.

I've only been in the funds for a couple of months. I'm brand new. I
asked the financial planner to try and get me 7 or 8% but that I would
settle for 6% and I'll be very happy. Interest rates in Canada on short
term deposits and interest investments are about 4% for 1 year or 90 day and
5% for 5 year give or take a few basis pts. In Canada interest is taxed at
your FULL rate rate. Dividend gains are taxed at Half your tax rate. In a
tax differed holding of course no taxes. I do hold mutual funds outside a
tax deferred account too and I will be concentrating on these before the
RRSP or retirement funds (I'm 30 after all).

One other fact in Canada is we are allowed to use our Retirement savings
plan to fund the cost of our FIRST house, up to a maximum of $20 000 per
spouse with no tax penalty. I would like to purchase a house so I can
contribute to a retirement plan as a method for purchasing my first home
although personally my desire is NOT to use retirement plan money for my
home. There is no tax penalty and you have 15 years to repay your
retirement fund back however if you take the money out of your plan into
your home then it isn't growing for your retirement tax free.

Afterwards Hilarity Ensued

unread,
Nov 30, 2006, 5:01:26 AM11/30/06
to

<w...@talisys.com> wrote in message
news:1164791799....@80g2000cwy.googlegroups.com...

>
> As for these numbers being applicable to blue color workers - I used a
> simple $10K after-tax contribution per year as an example. If you put
> $5K in per year, divide all the final numbers by 2. If you put $2500
> in, divide by 4. The ratios and percentages stay the same.

The numbers are very workable and I printed your response to study further.
Thanks to you for the effort in answering I really appreciate. Thanks to
everyone as well!!!

joetaxpayer

unread,
Nov 30, 2006, 8:24:51 AM11/30/06
to

Afterwards Hilarity Ensued wrote:

> "joetaxpayer" <joeta...@nospam.com> wrote in message

>>One question for the OP - Do you know what the expenses are for the funds

>>within your RSPP? It would be expressed as a percent, say 1.2%, or
>>hopefully in basis points as in 25 bpts (which is .25%). This would help
>>the precision of the replies. Assuming the fees are low, as low as you
>>could find outside the account, I lean back toward this answer. If the
>>fees are higher, that pushes me back to my original position.
>
>

> The fees are high. Each MER is around 1.6% although the aggressive

> growth I think is lower maybe 1.2%. Past performance suggests I should get
> about 6% to 8% average over the next 3 years. The aggressive fund has lost
> money in the past esp. 1999 and 2000 and 2001 with steep declines but has
> also gotten a couple high returns in the 14% the last few years I think.
>

> Right now I'll pay a planner his
> 5% in intial deposits and the fund companies their 2% in loads or whatever
> it is.
>

These fees are too high. So high I believe they wipe out the benefit of
the tax deferral. The types of funds you want should easily be found for
under .5%. An extra 1% per year will certainly drag your returns down.
There's no correlation between paying the higher fees and getting a
better return. I'm sure you'll see further comments as people read your
reply on the fees.
JOE

w...@talisys.com

unread,
Nov 30, 2006, 9:16:23 AM11/30/06
to
Those fees are very high but I suspect he would also get the same level
of fees in a taxable account considering he has a broker/advisor
picking the investments for him. Reading up on Canada's RRSP, it sounds
like an IRA with much higher contribution limits (18K per year). If
desired, anybody could do a self-directed RRSP and save on all the
fees. But some people just are more comfortable having paid experts
make the decisions for them. Finance, investing, budgetting, taxes,
etc. are tough issues for people to deal with. Not so much that it's
all that complicated -- the barrier is mostly psychological.

One of my coworkers has a daughter heading to college soon and a leased
car that'll be way over the mileage limit. During chitchat, we'd ask
what were her plans for saving/investing for those expenses and her
answer was "just too much for me to deal with -- maybe 6 months later,
I can think about it". Crazy because 6 months later, it'll be way
harder to save up.

My wife's friend wanted to start a college fund for her daughter. I
looked through all the 529 plans, saw Ohio seemed to be the best for CA
residents and pointed her to it. No dice, she did not want to open the
account herself because her husband would scold her if she had to ask
him for help managing the transactions (much less picking a fund that
dropped in value for any period). I told her there was a Charles Schwab
office around the block. Still not good enough, she needed somebody to
make all decisions for her and chose Washington Mutual at 6% load --
not that 6% gets her any help because I still had to configure her
online account, reset her password, etc.

BreadW...@fractious.net

unread,
Nov 30, 2006, 10:06:56 AM11/30/06
to
w...@talisys.com writes:
> zxcvbob wrote:

> > If you have a taxable account and you invest in stocks that you can buy
> > and hold forever (let's say Berkshire Hathaway, or an ETF like SPY) most
> > of your taxes are deferred until you sell them 30 years from now. Then,
> > the earnings are taxed at the long-term capital gains. Assuming capital
> > gains are taxed at a lower rate than ordinary income, you would be much
> > better off with your money in a plain old brokerage account rather than
> > an IRA or other tax-deferred retirement account.

> Popping your proposed case right now into the spreadsheet. Taxable at


> 15%, 0% turnover. 401K/IRA at 25% tax. And we get the following numbers
> after-tax:
>
> 10 years: 150K taxable versus 159K tax-deferred
> 20 years: 517K versus 572K
> 30 years: 1.44M versus 1.64M

Here - assuming 100k pre-tax to start with, 8% compounding, 15% cap
gains rate and 25% income-tax rate, 10 years:

Taxable:
pay taxes on the $100k: leaving $75k to invest
Grow the $75k at 8% annual: balance grows to $162k
sell it all - 75k is the cost basis, pay cap-gains taxes
on 87k: 75 + (87 * 0.85) = $148k to spend.

IRA:
Pay no taxes now. Invest $100k
Grow at 8% annual: now have $216k, never taxes.
Sell it all and pay income taxes of 25%: spend $162k.

Roth IRA:
Pay taxes now on the $100k, invest $75k
Grow at 8% annual: Now have $162k
No more taxes due - the whole $162 is spendable.

The difference is huge - and gets bigger over time -
and is due entirely to the fact that the compounded
growth - even at lower cap-gains rates - gets taxed
in the taxable account. Note that $162 number which
pops up in all three scenarios.

Unless you can invest the original capital pre-tax,
the lower cap-gains rate doesn't do you any good for
winning this race. Assuming the same investment and
the same return (and even 100% tax-efficiency - no
dividends along the way, no turnover) - the 401k, IRA,
whether Roth or not - always wins. With one exception -
if the original investment is a non-deductible one:

Exception - non-deductible contribution to a regular IRA:

Pay taxes on the $100k: leaving $75k to invest
Grow the $75k at 8%: now have $162k
Sell it all: $75k is basis, $87k is taxed as *income* at
the higher rate of 25%: $75k + (0.75 * $87k) = $140.25 spendable.

Perhaps this exceptional scenario is the one Bob was thinking
of - it certainly should give folks pause when they think
about investing via non-deductible contributions to a traditional IRA.
Note, though, that there are some very contrived assumptions
which make this exception the loser - in particular, the
assumption of perfect tax efficiency. Moreover, there are
still some advantages to having the money in the IRA versus
having it in a taxable account - better protection against
creditors, not counted for most college financial aid calculations,
etc - and the ability to rebalance without causing taxable events.

In other words, the Roth or the fully deductible IRA/401k are
both always winners. The only questionable one is the non-deductible
traditional IRA.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

rick++

unread,
Nov 30, 2006, 11:09:49 AM11/30/06
to
One comment: dont expect these projections to be necessary
true over the next 20 to 50 years or more. The tax landscape
has changed drastically the past 25 years and there is no
indication of that slowing down. Income and gains rates have changes.
Most of the accounts people are talking about now did not exist
then. So what to do about it?

- save, save, save. Its better to save in some way, rather than
agonize over the best way and save too little.

- take advantage of clear wins first like the "instant income" of
retirement matching.

- look at maximizing return rather than minimizing taxes.

- (controversial) dont put all your savings in the same kind of
account for when the tax laws change again.

Bucky

unread,
Nov 30, 2006, 12:56:08 PM11/30/06
to
BreadW...@fractious.net wrote:
> Assuming the same investment and
> the same return (and even 100% tax-efficiency - no
> dividends along the way, no turnover) - the 401k, IRA,
> whether Roth or not - always wins.

Exactly.

> With one exception -
> if the original investment is a non-deductible one:

Right. I don't think that is the case for the OP though. He has not
maxed out his RRSP, so increasing it is still deductible.

joetaxpayer

unread,
Nov 30, 2006, 3:01:19 PM11/30/06
to

w...@talisys.com wrote:

> Those fees are very high but I suspect he would also get the same level
> of fees in a taxable account considering he has a broker/advisor
> picking the investments for him. Reading up on Canada's RRSP, it sounds
> like an IRA with much higher contribution limits (18K per year). If
> desired, anybody could do a self-directed RRSP and save on all the
> fees.

I've not researched the RRSP details. This suggests it's not like our
401k account with a fixed list of funds.
If it were, my observation of 401k high fee vs post tax ETF, low fee
would hold. If OP chooses to spend the fees regardless, then your
spreadsheets are valid, and the difference between pre and post tax is
in favor of pre.

OP should read, and read some more, then consider what his choices are.
The index route (even just SPY, and maybe a mix of smaller cap, and/or
DVY) is likely his better choice.

JOE

zxcvbob

unread,
Nov 30, 2006, 3:45:25 PM11/30/06
to
BreadW...@fractious.net wrote:

>
> Exception - non-deductible contribution to a regular IRA:
>
> Pay taxes on the $100k: leaving $75k to invest
> Grow the $75k at 8%: now have $162k
> Sell it all: $75k is basis, $87k is taxed as *income* at
> the higher rate of 25%: $75k + (0.75 * $87k) = $140.25 spendable.
>
> Perhaps this exceptional scenario is the one Bob was thinking
> of - it certainly should give folks pause when they think
> about investing via non-deductible contributions to a traditional IRA.
> Note, though, that there are some very contrived assumptions
> which make this exception the loser - in particular, the
> assumption of perfect tax efficiency.

No, I'm not smart enough to have been thinking about that case.

Thanks for breaking out the examples like that. It's interesting that
(given your rate-of-return and tax rate assumptions) the Roth IRA and a
traditional pre-tax IRA end up with exactly the same value after taxes.

Best regards,
Bob

Bucky

unread,
Nov 30, 2006, 6:29:11 PM11/30/06
to
joetaxpayer wrote:
> If it were, my observation of 401k high fee vs post tax ETF, low fee
> would hold.

Not likely. The only way that a non-sheltered investment could beat a
tax-sheltered investment (IRA/401K/RRSP) is if the expense ratio
savings was greater than the tax savings. Given a 30% tax rate and a 7%
annual return, you're looking at tax savings of about 2-3%. Differences
in expense ratios are more like 1%.

BreadW...@fractious.net

unread,
Nov 30, 2006, 7:40:49 PM11/30/06
to
zxcvbob <zxc...@charter.net> writes:
> BreadW...@fractious.net wrote:
>
> > Exception - non-deductible contribution to a regular IRA:

> Thanks for breaking out the examples like that. It's interesting that


> (given your rate-of-return and tax rate assumptions) the Roth IRA and
> a traditional pre-tax IRA end up with exactly the same value after
> taxes.

That one sometimes surprises folks. It shouldn't, if one
writes out the math, it's just a slight rearrangement of
the same formula.

One more minor note - a Variable Annuity works out identical
to the non-deductible traditional IRA - ie. the worst case -
except that it has *additional* drag in the form of ongoing
annuity fees (the lowest in the industry is still 25bp) and
the funds available inside them invariably have higher expenses
than similar investments one may make outside the VA. The VA,
however, retains some of the advantages of the non-deductible IRA -
ie. not included in typical fin-aid calcs.

Not really to start in on VAs, but I still haven't seen any cases
where they make a lot of sense.

FWIW, the conditions which make an after-tax investment come
out ahead of a non-deductible one are pretty hard to make real,
so I figure that a non-deductible IRA versus a regular investment
is probably a wash financially, and a win based on some of the
additional protections the IRA affords (ie. against creditors, etc)

joetaxpayer

unread,
Nov 30, 2006, 8:02:24 PM11/30/06
to

Bucky wrote:

Ok. I ran a spreadsheet which I am happy to forward or post.

Assumptions;
Taxable Account
$10,000 deposit
Total return of 10%/yr, 8.5% is long term, 1.5% is dividends taxed each
year at 15%. The growth is taxed at 15% at withdrawal.
End of year 20 - $64,576 gross, net is $57457 (The LT gain was $47457
and is taxed 15% or $7119).

401K
Investment is $13,889 (the gross up of $10,000/.72)
Growth of 10% - .87% extra expense = 9.13%/yr.

20 years later $79863, tax is $22,362, net of $57,396

Over 20 years, it takes .87% in incremental expenses to negate the
pre-tax benefit.

For this exercise I used 28% tax rate, and didn't attempt to 'stack the
deck' by using a lower rate in early years and the 28% for the
withdrawal. Remember, the expense is every year, compounded. The 2-3%
'savings' you cite are mostly recouped at the end withdrawal.
(BTW - If I drop the return to 7%/yr, the numbers move to my favor, and
an expense difference of .69% is the break even, holding the tax rates
and time the same)

JOE

Bucky

unread,
Dec 1, 2006, 3:46:48 AM12/1/06
to
mea culpa, you are right.

I was fixated on the fact that assuming the same initial tax rate and
withdrawal tax rate, tax-sheltered accounts will always beat a
non-sheltered account. But I was overlooking the fact that long term
cap gains are 15%, which essentially lowers the non-sheltered account's
withdrawal tax rate to 15%. In which case a 1% expense ratio difference
will make the non-sheltered account the better choice.

Learn something new everyday!

Afterwards Hilarity Ensued

unread,
Dec 1, 2006, 4:59:24 AM12/1/06
to

"joetaxpayer" <joeta...@nospam.com> wrote in message
news:5N6dnXoT8KOa4vLY...@comcast.com...
>
>

>
> Ok. I ran a spreadsheet which I am happy to forward or post.
>

Send a copy of your spreadsheet to colba...@hotmail.com for me please with
cherries on top. I would really appreciate. Maybe I can build upon it
somehow.

I'm contributing equal amounts of money to both sheltered and non sheltered
investments and I'd like to play with some numbers and see what sort of
returns "might" be in the future. It'll let me know if I'm being too
conservative or too aggressive and hopeful.....

w...@talisys.com

unread,
Dec 1, 2006, 12:34:26 PM12/1/06
to
Looking through the various Canadian retirement options, here's what
the rough analogs seem like:

CRA = IRS
CPP = Social Security
QPP = Social Security for Quebec'rs
RPP = 401K
RSPP = IRA
QIC = Annuity

My spreadsheet also agrees with you. If 100% capital gains in taxable,
the threshold is about ~0.85% in extra expenses. If it's a balanced
portfolio of dividend payers+REITS+bonds+etc, the threshold is more
about ~1.35%. Of course, if you do both taxable and tax-deferred, you
should split out LTCG stuff in taxable and dividends/REITS/bonds in
tax-deferred for maximum bang.

Bucky

unread,
Dec 1, 2006, 5:48:54 PM12/1/06
to
Afterwards Hilarity Ensued wrote:
> Send a copy of your spreadsheet to colba...@hotmail.com for me please with
> cherries on top. I would really appreciate. Maybe I can build upon it
> somehow.

I created a simple version with Google Spreadsheets so that everyone
can view it. In order to play with the parameters, you need to do File
> Copy Spreadsheet (and you'll need a google account too).
http://spreadsheets.google.com/ccc?key=p1M231BTmDz1viBhM4UujZA

The key parameter related to the case that JOE was talking about is the
total return. For the taxable account, the annual return is reduced by
0.22% (1.5% dividends taxed at 15% rate). For the tax-deferred account,
the total return is reduced by 1% assuming greater expense ratio.

Bucky

unread,
Dec 1, 2006, 5:54:07 PM12/1/06
to
joetaxpayer wrote:
> Over 20 years, it takes .87% in incremental expenses to negate the
> pre-tax benefit.

I thought of another factor too. Those assumptions also mean that you
cannot sell the investments in the taxable account. Otherwise, you will
have to pay the cap gains that year. Even with a buy and hold
philosophy, you will probably be doing some rebalancing every few
years, which will reduce the effective annual return. In the
tax-deferred account, rebalancing has no tax impact.

joetaxpayer

unread,
Dec 1, 2006, 7:02:55 PM12/1/06
to


your "tax deferred" looks right. I get the $56045 as well.
the "taxable" seems off. The first year, 10K gives off $150 in
dividends, which nets $128 after tax. You need to keep a tally of
reinvested dividends, so in my sheet, reinvested dividends adds up to
$7119, which isn't taxed again, as it's added to basis. Taxable gain is
$47457 and the net final number for me is $57457. My spreadsheet
requires a calculation line each year to tally the dividend, so it won't
likely fit on one page the way Google or iRows sets up. I need to spend
time to see if it makes sense to load it there.
AHE - your email address bounced on me as 'not valid'.

JOE

Elizabeth Richardson

unread,
Dec 1, 2006, 9:37:11 PM12/1/06
to

> The key parameter related to the case that JOE was talking about is the
> total return. For the taxable account, the annual return is reduced by
> 0.22% (1.5% dividends taxed at 15% rate). For the tax-deferred account,
> the total return is reduced by 1% assuming greater expense ratio.


And if you have Vanguard funds in your tax-deferred account? Why are we
assuming greater expense ratio in the tax-deferred accounts?

Elizabeth Richardson

joetaxpayer

unread,
Dec 1, 2006, 9:55:11 PM12/1/06
to

Elizabeth Richardson wrote:

Because to answer the question "should I fund my pre-tax account as much
as I can or invest post-tax (but not Roth)?" I proposed that it would be
good to know the expenses within the pre-tax account. Then I ran a
spreadsheet or two, and found that holding tax rates even, (going in and
comming out) that the pre-tax account was favorable unless its expense
was about .85% higher. It wasn't an assumption, it was a calculated
breakeven point (for a 20 year time horizen).
JOE

Mark Freeland

unread,
Dec 1, 2006, 9:58:41 PM12/1/06
to
<BreadW...@fractious.net> wrote in message
news:yobodqo...@panix3.panix.com...

>> (given your rate-of-return and tax rate assumptions) the Roth IRA and
>> a traditional pre-tax IRA end up with exactly the same value after
>> taxes.
>
> That one sometimes surprises folks. It shouldn't, if one
> writes out the math, it's just a slight rearrangement of
> the same formula.

This is correct if one is not maxing out the IRA. Otherwise (with the same
assumptions, viz. no change in tax rates), the Roth comes out better.
The reason is that the Roth lets you shelter more money (when viewed in
terms of post-tax value).

Using essentially the same assumptions, except we'll say that the person has
$5K, pre-tax, and the contribution limit is $4K ...

Traditional IRA:
Invest $4K, pre-tax.
Pay $250 taxes on the remaining $1K, leaving $750 outside of the IRA.
Grow at 8% annual: now have $8,640 in IRA, $1,620 outside.

Pay 25% taxes on the IRA, 15% taxes on the taxable gain, leaving:
$6,480 (net IRA) + $750 (orig. basis) + .85 * $870 (gain) = $7,969.50.

Roth IRA:
Invest $4K, using remaining $1K to pay taxes on it.
Grow at 8% annual: now have $8,640.


> One more minor note - a Variable Annuity works out identical
> to the non-deductible traditional IRA - ie. the worst case -
> except that it has *additional* drag in the form of ongoing
> annuity fees (the lowest in the industry is still 25bp) and
> the funds available inside them invariably have higher expenses
> than similar investments one may make outside the VA.

Assuming that you are talking about Fidelity's annuity (Vanguard's costs
30bp), note:
- "Similar" investments are not the same funds; Fidelity's VIP funds used
in annuities not only have separate portfolios, the funds often have
different managers, e.g. Mid Cap (Perkins) vs. VIP Mid Cap (Allen).
- The VIP funds may have higher or lower expenses, e.g. Contrafund's
expense ratio is 0.90%, while VIP Contra's is 0.79% (plus the annuity
expenses, of course)

For investments over $96K, there is a noload annuity with an even lower
drag - Jefferson National offers an annuity with a flat $240/year fee.
http://www.jeffnat.com/aboutourfunds/ (with thanks to another poster on
misc.invest.mutual-funds, about a year ago).

Mark Freeland
BnetO...@sbcglobal.net

Afterwards Hilarity Ensued

unread,
Dec 2, 2006, 4:59:26 AM12/2/06
to

"Bucky" <uw_ba...@email.com> wrote in message
news:1165013622.3...@n67g2000cwd.googlegroups.com...

Capital gains, at least in Canada are taxable at much lower rates than other
forms of income. That said Capital gains Losses mean a tax refund of sort
so there is incentive to dispose of underperforming or declining positions.
I also believe that capital gains and losses can be carried forward for a
few more years. I know the losses are anyways, but I'll have to double
check the gains as well. You can have a stellar year in your taxable
investments and offset that with your dismal year from say 2 years prior to
balance the tax penalty.

In many cases don't most mutual funds or other fund managing firms pay your
taxes in those funds on your behalf? I've selective funds that pay
dividends as well has having solid large cap companies and dividends are
taxable for me at 8.5% but the fund company pays those on my behalf based on
how many fund shares I own, then disperses the dividends either to my
account or reinvests the dividends...

Also in Canada many companies converted to a form of trust unit so that
profits are dispersed to unit holders (Is that what a REIT is?). The
government here saw they were going to lose about 500 million in corporate
taxes a year so they elected to stop the practise of tax free profit
dispersal by 2010 or 2011 (causing a 20 billion dollar wipe-out of security
assets in a day for a nation of 30 million people).

Afterwards Hilarity Ensued

unread,
Dec 2, 2006, 6:16:39 PM12/2/06
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"joetaxpayer" <joeta...@nospam.com> wrote in message
news:kaKdnfFxQp8EX-3Y...@comcast.com...

>
>
> AHE - your email address bounced on me as 'not valid'.

colba...@hotmail.com Watch the spelling :)

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