"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:kaKdnfFxQp8EX-3YnZ2dnUVZ_tidnZ2d[at]comcast.com...
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colbalt1177[at]hotmail.com Watch the spelling

"Bucky" <uw_badgers[at]email.com> wrote in message
news:1165013622.308666.298170[at]n67g2000cwd.googlegroups.com...
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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).

<BreadWithSpam[at]fractious.net> wrote in message
news:yobodqoh2jq.fsf[at]panix3.panix.com...
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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.


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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
BnetOnewsX[at]sbcglobal.net

Elizabeth Richardson wrote:

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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

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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

Bucky wrote:
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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

joetaxpayer wrote:
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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.

Afterwards Hilarity Ensued wrote:
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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
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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.

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.


joetaxpayer wrote:
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"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:5N6dnXoT8KOa4vLYnZ2dnUVZ_ridnZ2d[at]comcast.com...

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Send a copy of your spreadsheet to colbalt177[at]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.....

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!

Bucky wrote:

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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

zxcvbob <zxcvbob[at]charter.net> writes:
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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)


--
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?
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joetaxpayer wrote:
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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%.

BreadWithSpam[at]fractious.net wrote:

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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

wyu[at]talisys.com wrote:

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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

BreadWithSpam[at]fractious.net wrote:
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Exactly.

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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.

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.

wyu[at]talisys.com writes:
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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?
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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.


joetaxpayer wrote:
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