Originally Posted by mathjak107
if you can get them tax free that trumps all . other wise fund dividends being taxable and fund turnover are key . even a 1% dividend over a typical accumulation period of 30-40 years will destroy tax savings .
owning index funds may not matter either as they too can have turnover .
kitces did an excellent article on the fact we may have been told wrong .
I'd have to spend a lot more time working through the math to see how this works but at first blush it just doesn't seem right.
Here are the initial assumptions . . .
The stocks are assumed to grow at a long-term return of 10%, and the bonds at 5%. The IRA is taxed (at 25% ordinary income rates) at the end upon liquidation, the stocks in the taxable account are also taxed at the end upon liquidation but at 15% long-term capital gains rates, and the bonds in the taxable account are simply taxed annually (also at 25% ordinary income rates).
So bonds return 5% and are taxed at 25%. Equity is assumed to be taxed at 15%. He then changes the scenario as follows . . .
For instance, if the long-term appreciation for equities is only 5% (which on top of a 2% dividend would lead to a total return of “just” 7%), there is still a benefit to holding equities inside an IRA in the long run, but not as much:
So he's claiming that paying 25% every year on 100% of your 5% bond income plus paying 25% on your 7% capital gains & dividends instead of 15% is better because by putting your stocks in an IRA you
delay the annual 15% hit on a fraction of your 7% qualified dividends and gains?
I'd need to walk through the numbers before I believe that. By putting stocks in the IRA I pay more taxes every year and
I pay more taxes at liquidation. How can that be better?
My guess is that he's not stepping up the stock basis as he increases the fund turnover percentage and therefore is taxing that twice at 15% each.
My second guess is that he's not rebalancing the portfolio so whatever tax drag hits the equity account compounds forever instead of getting reallocated across both the equity and fixed income positions.
Fix those two things and my third guess is that this issue goes away entirely.