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Old 05-20-2016, 04:19 AM   #41
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the problem is for those who have enough in assets to worry about this stuff odds are once ss kicks in tax free 100% will not be the case . you can see that from the poll they did here .

i know in our case just both our ss , a small 20k pension and the little bits of non qualified dividends and interest we get leave very little room left in the tax free 15% bracket . this will get worse once rmd's kick in .

distributions from our funds can range from 29k to 69k a year . so our real life scenario is we would have been better off reversing things .

to late now .

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Old 05-20-2016, 05:06 AM   #42
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Originally Posted by mathjak107 View Post
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 avoid 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.

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Old 05-20-2016, 05:49 AM   #43
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The Kitces analysis assumes the tax rate on the IRA withdrawal final portfolio value is equal in all scenarios. This cannot be - if the final portfolio value is higher for equities vs FI, the IRA marginal tax rate must also be higher.
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Old 05-20-2016, 07:01 AM   #44
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not always . brackets are pretty wide as well as increase yearly with more and more money going through in lower brackets over time . pretty soon `100k will be in the 15% bracket .

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