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• ##### Another *very* possible scenario(0+ / 0-)

involves stocks that pay no dividends at all, but have enormous capital growth. Until very recently, Apple Computer was in this category.

Ten years ago, you could have bought about 1,350 shares of Apple Computer for \$10,000. Today, you could sell those shares for about \$784,000.

If that money were in an IRA, your tax bite would be something like \$784,000 x 33% = \$257,936. (Yes, you could spread that out over some years, but you'd still have to pay it.)

If that money were in a post-tax account, your tax bite would be (\$784,000 - \$10,000) x 15% = 116,000.

Which tax bill would you rather owe? It's possible that you could still do better with the IRA in this scenario, thanks to deferrals and re-investments, but I wouldn't bet my life on it.

Let us all have the strength to see the humanity in our enemies, and the courage to let them see the humanity in ourselves.

[ Parent ]

• ##### no no no(0+ / 0-)

If that money were in a post-tax acct, it wouldn't be \$784K because you wouldn't have had \$10K to invest. You'd have \$6700 to invest (after paying 33% tax on the \$10K you started with).

So the total after growth would be \$784K *0.67 = \$525,000 only. And to add insult to injury, you'd still have to pay 15% on the capital gain.

Sure you pay less taxes in nominal dollars, because you pay those taxes earlier rather than later. But you have less left over with post-tax investing, and that's what matters.

Read my posts again. They are mathematically precise. The point is, with pre-tax you're investing more money, not the same money, if you start from the same amount in both cases.

Incidentally, 'deferrals and reinvestments' have absolutely nothing to do with this. You don't pay cap gains tax until you sell, and you don't pay taxes on a retirement account until you sell.

• ##### Sigh(0+ / 0-)

You cannot always assume that an investor who can save X dollars by investing in an IRA would choose to invest the saved money in addition to the original basis of the investment. If I can save \$1000 through bargaining on a new car, I'm not going to spend that \$1000 on buying a bigger and better car. Similarly, I might choose to invest \$13,300 in Apple Computer, instead of only \$10,000, if I could do so. But I very well might not choose to do so.

Seriously, any investor's risk tolerance only goes so far. Considering the very real possibility of losing that entire original investment (who knew, ten years ago, just how successful Apple would be today?), it might be very wise to take that tax savings and invest it elsewhere. (Like buying a hybrid instead of a conventional engine :-)

Let's put it this way: By taking your reasoning to its extreme, a Roth IRA (in which the original investment is taxable, but taxes are never paid on withdrawals) is always a loser's game compared to a traditional IRA. I'd argue that the Roth IRA can be a good choice, depending on how I weigh the value of tax dollars saved today, vs. tax dollars saved in the future. (Keep in mind that both kinds of IRA have the same limits on annual investments, so \$10,000 may be the maximum I can put into either one. In that case, if I want to maximize the amount available to me in retirement, vs. the amount available today, I'd have to choose the Roth IRA.)

You may think I'm stretching to make this point, but to me you're stretching to assume that your reasoning covers all possible cases. I do understand your reasoning perfectly well, believe me. Your reasoning is fine; it's your assumptions that I'm arguing with.

And I'm sorry if I wasn't clear, but "deferrals and reinvestments" have everything to do with it. What I meant was that my assumption is that the proceeds from the sale are immediately withdrawn from the IRA. This is a valid point to raise on your behalf, because in reality an investor is unlikely to withdraw the entire \$784,000 in one year. If it's withdrawn over several years, this allows the remainder to be reinvested, and defers the tax bill for the reinvested sum. That does change the calculations -- probably, but not definitely, in favor of the IRA.

Let us all have the strength to see the humanity in our enemies, and the courage to let them see the humanity in ourselves.

[ Parent ]

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