|
Posted by Brablo on November 10, 2006, 2:02 am
Please log in for more thread options
I know finance and investments quite well. However, I can't
understand what the advantages of 401K/Roth IRAs *VS* the
retail accounts are. Here are my questions using an example.
On January 1st, 2000, I invested $100,000 in many different
mutual funds. My cost basis was $100,000. As of November 8,
2006, my investment has increased in value to $170,000.
1. If this were in a retail account (not in a tax-sheltered
vehicle such as a IRA or 403B), when does it get taxed -
every year, or only when I cash out or make a trade?
2. If this were in a retail account at a bank, does only the
*earnings* get taxed?
3. I understand short/long term capital gains. Suppose that
I don't do a trade, but that I'm a buy/hold investor. You
mean to tell me that every year, the
dividends/earnings/interest would get taxed at the long term
rates or as earning? This implies that i'd have to sell
some securities to pay off the taxes.
4. In a Roth IRA, the investor puts in money *POST* taxes.
The money grows to $170,000. Upon distribution (assuming
the person is more than 59.5), NONE of the money gets taxed.
Is this TRUE/FALES?
5. For a 401K, the money gets put on a pre-tax basis. The
money grows to $170K. *ALL* the money gets taxed as
earnings when she's 59.5. Is this TRUE/FALSE?
6. Using numbers, how is one better than another (how is the
401K/Roth IRA better than a retail account)?
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Phil Marti on November 10, 2006, 5:10 pm
Please log in for more thread options
> I know finance and investments quite well. However, I can't
> understand what the advantages of 401K/Roth IRAs *VS* the
> retail accounts are. Here are my questions using an example.
>
> On January 1st, 2000, I invested $100,000 in many different
> mutual funds. My cost basis was $100,000. As of November 8,
> 2006, my investment has increased in value to $170,000.
>
> 1. If this were in a retail account (not in a tax-sheltered
> vehicle such as a IRA or 403B), when does it get taxed -
> every year, or only when I cash out or make a trade?
Both. Mutual funds must distribute their income each year,
and it's usually a mix of ordinary income and LTCG. That
income is taxable to you whether you take it in cash or
reinvest, which is the equivalent of buying more shares with
the cash you got.
When you sell shares of a fund, you have a cap gain/loss.
> 2. If this were in a retail account at a bank, does only the
> *earnings* get taxed?
The type of institution has no effect on the taxation. It's
the type of investment that matters.
> 3. I understand short/long term capital gains. Suppose that
> I don't do a trade, but that I'm a buy/hold investor. You
> mean to tell me that every year, the
> dividends/earnings/interest would get taxed at the long term
> rates or as earning? This implies that i'd have to sell
> some securities to pay off the taxes.
We already covered the taxable income part. Where you get
the money to pay the taxes is up to you.
> 4. In a Roth IRA, the investor puts in money *POST* taxes.
> The money grows to $170,000. Upon distribution (assuming
> the person is more than 59.5), NONE of the money gets taxed.
> Is this TRUE/FALES?
True, assuming the Roth IRA is at least 5 years old.
> 5. For a 401K, the money gets put on a pre-tax basis. The
> money grows to $170K. *ALL* the money gets taxed as
> earnings when she's 59.5. Is this TRUE/FALSE?
It all gets taxed as ordinary income when it comes out.
> 6. Using numbers, how is one better than another (how is the
> 401K/Roth IRA better than a retail account)?
Extremely individual question. You can find lots of guides
on the Internet, or you might benefit from a session with a
fee-for-service financial planner.
--
Phil Marti
Clarksburg, MD
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by joetaxpayer on November 10, 2006, 5:10 pm
Please log in for more thread options Brablo wrote:
> On January 1st, 2000, I invested $100,000 in many different
> mutual funds. My cost basis was $100,000. As of November 8,
> 2006, my investment has increased in value to $170,000.
Given the S&P was 1455 then, and 1380 now, even with
dividends, many people are just breaking even from purchases
back then. You must have chosen well.
> 1. If this were in a retail account (not in a tax-sheltered
> vehicle such as a IRA or 403B), when does it get taxed -
> every year, or only when I cash out or make a trade?
Any dividend distributions and cap gain distributions from
mutual funds are taxed the year they are distributed. Then
when you sell the mutual fund you may have a gain or loss
and that's taxed accordingly.
> 2. If this were in a retail account at a bank, does only the
> *earnings* get taxed?
No different at a bank or broker. Banks offer mutual funds,
brokers offer CDs, the taxation depends on the product not
the institution.
> 3. I understand short/long term capital gains. Suppose that
> I don't do a trade, but that I'm a buy/hold investor. You
> mean to tell me that every year, the
> dividends/earnings/interest would get taxed at the long term
> rates or as earning? This implies that i'd have to sell
> some securities to pay off the taxes.
If you are long term, only the distributed dividend/ cap
gains from the fund are taxed, as I stated for (1). The
appreciation of the fund itself isn't taxed until you sell
it. You can pay the tax out of the distributions, you
wouldn't have to sell any fund shares.
> 4. In a Roth IRA, the investor puts in money *POST* taxes.
> The money grows to $170,000. Upon distribution (assuming
> the person is more than 59.5), NONE of the money gets taxed.
> Is this TRUE/FALES?
TRUE. (it was already taxed the once upon earning it, no
further tax)
> 5. For a 401K, the money gets put on a pre-tax basis. The
> money grows to $170K. *ALL* the money gets taxed as
> earnings when she's 59.5. Is this TRUE/FALSE?
FALSE - The money is taxed as ordinary income as it's
withdrawn, you do not have to take it all out at 59.5. The
presumption is that the withdrawals will be spread over the
person's remaining lifespan. (of course the choice is still
yours)
> 6. Using numbers, how is one better than another (how is the
> 401K/Roth IRA better than a retail account)?
The Roth will always beat the 'retail' account, as it's
never taxed again. The 401 gets a tax break up front, but is
taxed coming out. Say you are in the 28% bracket. You put in
a dollar, but it just cost you 72 cents. Next year, you are
59.5 and retire. You are in the 15% bracket and the dollar
comes out and is taxed, you now have 85 cents (plus whatever
growth you got in the year). This difference is magnified
over the long term. Playing with a spreadsheet and different
scenarios can confirm whether the pretax 401 beats the
retail account. For some huge savers, they may retire in a
higher bracket and post tax savings makes more sense for
them. (But most 401 accounts have a matching provision, and
one should deposit enough to get the maximum match is almost
all circumstances.) JOE
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Herb Smith on November 10, 2006, 5:10 pm
Please log in for more thread options Brablo wrote:
> I know finance and investments quite well. However, I can't
> understand what the advantages of 401K/Roth IRAs *VS* the
> retail accounts are. Here are my questions using an example.
>
> On January 1st, 2000, I invested $100,000 in many different
> mutual funds. My cost basis was $100,000. As of November 8,
> 2006, my investment has increased in value to $170,000.
>
> 1. If this were in a retail account (not in a tax-sheltered
> vehicle such as a IRA or 403B), when does it get taxed -
> every year, or only when I cash out or make a trade?
Your dividends, interest and capital gain distributions are
taxable in the year distributed, even if reinvested into
additional mutual fund shares. Trades are taxable to the
extent that there is a gain (sell for more than basis),
regardless of whether they are "exchanged" into different
mutual funds.
> 2. If this were in a retail account at a bank, does only the
> *earnings* get taxed?
See #1, same answer.
> 3. I understand short/long term capital gains. Suppose that
> I don't do a trade, but that I'm a buy/hold investor. You
> mean to tell me that every year, the
> dividends/earnings/interest would get taxed at the long term
> rates or as earning?
Certain "qualified" dividends will be taxed at either 5% or
15% (depending on other income), but the rest will be taxed
as ordinary income. This is a surprise to you? This is for a
retail/taxable account.
> This implies that i'd have to sell
> some securities to pay off the taxes.
Only if you reinvest all earnings and don't keep a cash
account to pay the taxes.
> 4. In a Roth IRA, the investor puts in money *POST* taxes.
> The money grows to $170,000. Upon distribution (assuming
> the person is more than 59.5), NONE of the money gets taxed.
> Is this TRUE/FALES?
TRUE, as long as the Roth IRA has been open for at least 5
years prior to distribution. Withdrawal of contributions can
be done tax and penalty free at any time. No mandatory
withdrawals are ever required, no matter what age you are.
> 5. For a 401K, the money gets put on a pre-tax basis. The
> money grows to $170K. *ALL* the money gets taxed as
> earnings when she's 59.5. Is this TRUE/FALSE?
FALSE. All withdrawals from a 401K account (usually only
after terminating employment or retiring) are taxed as
ORDINARY income. NO capital gains treatment, except in
certain situations involving employer stock. Withdrawals
before age 59.5 are subject to a 10% penalty. Mandatory
withdrawals (based on life expectancy) are required when you
turn 70.5 or older, unless you continue to work for that
employer.
> 6. Using numbers, how is one better than another (how is the
> 401K/Roth IRA better than a retail account)?
Go to http://www.fairmark.com and get all the answers.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Rich Carreiro on November 11, 2006, 10:35 am
Please log in for more thread options
> On January 1st, 2000, I invested $100,000 in many different
> mutual funds. My cost basis was $100,000. As of November 8,
> 2006, my investment has increased in value to $170,000.
>
> 1. If this were in a retail account (not in a tax-sheltered
> vehicle such as a IRA or 403B), when does it get taxed -
> every year, or only when I cash out or make a trade?
Interest/dividends/capital gain distributions are taxed
every year. Any actual share price appreciation is only
taxed when you sell.
> 2. If this were in a retail account at a bank, does only the
> *earnings* get taxed?
See above.
> 3. I understand short/long term capital gains. Suppose that
> I don't do a trade, but that I'm a buy/hold investor. You
> mean to tell me that every year, the
> dividends/earnings/interest would get taxed at the long term
> rates or as earning?
Dividends and interest absolutely get taxed as ordinary
income every year, regardless of whether or not you trade
the positions.
> This implies that I'd have to sell some securities to pay off
> the taxes.
So?
> 4. In a Roth IRA, the investor puts in money *POST* taxes.
> The money grows to $170,000. Upon distribution (assuming
> the person is more than 59.5), NONE of the money gets taxed.
> Is this TRUE/FALES?
Under current law, TRUE.
> 5. For a 401K, the money gets put on a pre-tax basis. The
> money grows to $170K. *ALL* the money gets taxed as
> earnings when she's 59.5. Is this TRUE/FALSE?
Under current law, TRUE. However, you have to keep in
mind that the person had all those years the use of the
money saved because their taxes were reduced because of the
contribution deduction.
--
Rich Carreiro rlcarr@animato.arlington.ma.us
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
| Similar Threads | Posted | | Re: Buying a Retail Business | June 4, 2006, 1:13 am |
| Transfer of 457 Account | September 14, 2008, 12:05 pm |
| Brokerage account | October 14, 2008, 12:13 pm |
| Health Savings Account | February 25, 2007, 5:00 am |
| Flex account medical? | March 18, 2007, 2:18 am |
| Estate tax on tax-deferred account | October 12, 2007, 11:25 pm |
| UK offshore account tax issues? | December 11, 2007, 4:05 pm |
| How to account for travel mileage!! | June 20, 2006, 2:12 am |
| Taxes and 403(B) Retirement Account | October 7, 2008, 12:14 am |
| Non US Resident With Brokerage Account in US | November 14, 2008, 10:34 pm |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap