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Posted by Doug on August 8, 2009, 10:24 pm
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This will either start an interesting discussion or reveal me to be
seriously uninformed about something very, very basic.
I'm usually ineligible, thank God, to make deductible (qualified)
contributions to a traditional IRA. I am also usually ineligible to
contribute to a Roth.
But in any case: in my regular investment accounts my gains are taxed at
capital gains rates when they are realized, but in an IRA they
eventually get taxed at the same (higher) rate as earned income. Maybe
over decades the benefits of deferring the taxes on the gains make up
for doubling the rate at which they will be taxed, but for someone over
50 does it make any sense to defer taxes at the cost of doubling them?
Doug
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Posted by Steve Pope on August 8, 2009, 10:55 pm
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>This will either start an interesting discussion or reveal me to be
>seriously uninformed about something very, very basic.
>I'm usually ineligible, thank God, to make deductible (qualified)
>contributions to a traditional IRA. I am also usually ineligible to
>contribute to a Roth.
>But in any case: in my regular investment accounts my gains are taxed at
>capital gains rates when they are realized, but in an IRA they
>eventually get taxed at the same (higher) rate as earned income. Maybe
>over decades the benefits of deferring the taxes on the gains make up
>for doubling the rate at which they will be taxed, but for someone over
>50 does it make any sense to defer taxes at the cost of doubling them?
The answer is, if you're confident you can make capital gains,
then usually you want to place those investments outside of any
retirement accounts.
But place into the retirement count investments that produce
regular taxable income, such as taxable bonds, as well as
some other categories like gold.
If you're a pure-play stock-market (or private equity) investor
predicting large capital gains with a short horizon, then retirement
accounts don't buy you much. But they will have benefits when you
shift to something more conservative.
Steve
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<< 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. >>
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<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Seth on August 12, 2009, 5:37 pm
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>If you're a pure-play stock-market (or private equity) investor
>predicting large capital gains with a short horizon, then retirement
>accounts don't buy you much.
Yes, they do: short-horizon is short term capital gains, with high
taxes.
> But they will have benefits when you
>shift to something more conservative.
If that's long-term capital gains, there's much less in the way of
benefits.
Seth
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<< ------------------------------------------------------- >>
<< 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 >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by Steve Pope on August 12, 2009, 6:15 pm
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>>If you're a pure-play stock-market (or private equity) investor
>>predicting large capital gains with a short horizon, then retirement
>>accounts don't buy you much.
>Yes, they do: short-horizon is short term capital gains, with high
>taxes.
I should clarify by "short horizon" I meant under 5 years
or so. The significant tax advantage of retirement plans is
over the longer term.
Steve
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<< ------------------------------------------------------- >>
<< 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 (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by Mark Bole on August 9, 2009, 10:51 am
Please log in for more thread options Doug wrote:
> This will either start an interesting discussion or reveal me to be
> seriously uninformed about something very, very basic.
Or, maybe somewhere in between! ;-)
> But in any case: in my regular investment accounts my gains are taxed at
> capital gains rates when they are realized, but in an IRA they
> eventually get taxed at the same (higher) rate as earned income.
But, you have to ask yourself, what will capital gains rates be in
retirement? What will your tax bracket be in retirement? Does your
state even have a special rate for capital gains (California does not).
The IRA (and 401k) are based on the simple concept that your marginal
ordinary tax rate in retirement (when you take distributions) will be
significantly lower than your marginal ordinary tax rate during your
peak earning years. Using today's rates, a drop from 25% to 15% tax
bracket is quite significant.
If your rate will *not* be lower in retirement, then you're right, a
traditional IRA is not much of an advantage.
Think of it as a form of diversification -- have some investment in
tax-deferred accounts, some in regular tax accounts, then hopefully
whichever way the tax law blows, you'll get the usual benefits of
diversification.
The other benefit, for some, is the "forced savings" aspect of
retirement accounts. They're structured to strongly discourage you from
touching the money once you set it aside. Kind of like what home equity
used to be, before the banks encouraged people to turn their houses into
ATM's.
> Maybe
> over decades the benefits of deferring the taxes on the gains make up
> for doubling the rate at which they will be taxed, but for someone over
> 50 does it make any sense to defer taxes at the cost of doubling them?
Don't know where you get "doubling", see above. You have hit on another
key feature, though: if you have the discipline to also invest the
amount you save in taxes each year, then you'll maximize the benefit.
For example, put $4K in your Trad IRA/401k, and also put the $1K tax
savings (at 25% bracket) in a long-term investment.
It's not hard to work up a spreadsheet to run some scenarios. As I just
mentioned, to compare apples-to-apples, don't forget to include the
actual tax dollars that were deferred in your calculations.
You should definitely look into the advantages of contributing (or
converting) to Roth IRA in 2010 when the income limits go away. Sounds
like you don't have anything to convert. Some people have been making
non-deductible contributions to Trad. IRA for the last several years in
anticipation of converting when the limits went away.
-Mark Bole
--
<< ------------------------------------------------------- >>
<< 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 (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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