C
Cut-Throat
Guest
Not True at all. - The difference is the interest you would be losing by paying the 15% now.
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Not True at all. - The difference is the interest you would be losing by paying the 15% now.
Here's the math, taking an example of $1000 in pre-tax earnings that is invested for 20 years at a pre-tax rate of 10%. Say that the tax rate is 15%.
A. The "Roth IRA" case. The money is initially taxed at 15%, leaving $850 to invest. Its future value "F" in 20 years (not subject to additional tax) will be
F = $850 (1 + 0.10) exp 20 = $5,718.38
B. The "401(k)" case. The money is not taxed initially, grows tax-free, and then is taxed at 15% at the end of 20 years.
Before taxes, F = $1,000 (1 + 0.10) exp 20 = $6,727.50
After taxes, F = $6,727.50 (1 - .15) = $5,718.38
These two results are exactly the same (because of the principle that a x b x c equals b x a x c).
C. The "Non-Qualified Account" case. The money is taxed initially, and then the earnings on it are taxed every year. The effect of the yearly tax on earnings is to reduce the growth rate from 10% per year to 8.5% per year, and look what this does:
The initial after-tax amount is $850 and this grows at 8.5% per year, after-taxes, so the future amount (on which no further taxes are owed) is
F = $850 (1 + .085) exp 20 = $4,345.24
Note that a relatively modest 15% tax on the earnings has reduced the future value by $1,373.14 (24%)relative to its value in the qualified accounts, and by $2,382.26 (35%) relative to its value if it were not taxed at all.
What is happening is that the annual tax on earnings is substantially reducing the benefits of compounding. Fees paid to financial managers have the same effect. Vanguard is absolutely right when they point out the benefits of keeping these costs to a minimum -- it's not just another marketing gimmick!
A. The "Roth IRA" case. The money is initially taxed at 15%, leaving $850 to invest. Its future value "F" in 20 years (not subject to additional tax) will be
F = $850 (1 + 0.10) exp 20 = $5,718.38
B. The "401(k)" case. The money is not taxed initially, grows tax-free, and then is taxed at 15% at the end of 20 years.
Before taxes, F = $1,000 (1 + 0.10) exp 20 = $6,727.50
After taxes, F = $6,727.50 (1 - .15) = $5,718.38
These two results are exactly the same (because of the principle that a x b x c equals b x a x c).
C. The "Non-Qualified Account" case. The money is taxed initially, and then the earnings on it are taxed every year. The effect of the yearly tax on earnings is to reduce the growth rate from 10% per year to 8.5% per year, and look what this does:
The initial after-tax amount is $850 and this grows at 8.5% per year, after-taxes, so the future amount (on which no further taxes are owed) is
F = $850 (1 + .085) exp 20 = $4,345.24
Note that a relatively modest 15% tax on the earnings has reduced the future value by $1,373.14 (24%)relative to its value in the qualified accounts, and by $2,382.26 (35%) relative to its value if it were not taxed at all.
What is happening is that the annual tax on earnings is substantially reducing the benefits of compounding. Fees paid to financial managers have the same effect. Vanguard is absolutely right when they point out the benefits of keeping these costs to a minimum -- it's not just another marketing gimmick!
BigMoneyJim
Thinks s/he gets paid by the post
My brain is not in math mode today, but keep in mind when you add in external money to pay taxes you're unbalancing the comparison.
Example:
$10,000 IRA + $1500 = $10,000 Roth IRA, example future value of $20,000 untaxable in 10 years
$10,000 IRA + $1500 might equal $11,500 trad. IRA, example future value of $23,000 pre-tax in 10 years, $19,550 after 15% tax
If I did that right then the Roth still comes out ahead, but there are other possibilities for that $1500 you had available in the example to pay the tax on the conversion.
jojodontno
Confused about dryer sheets
- Joined
- Sep 30, 2003
- Messages
- 7
may I join you?all of you made some valid point,but estate taxes or estae building?roth ira are the way.
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Three card monte- fixed pension, taxable dividends(some growth) and now at age 60 - IRA. Plus when do I throw in SS - 62,66, or 70? Single 15% bracket - expect to jump one bracket at least if I let IRA ride to 701/2 at 7% or more.
Case 1. Roth 10k per year to age 70 and pay taxes from dividend steam - and spend down taxable pot as necessary. Take SS at 70.
Case 2. Spend each income stream as it comes to bear - fixed pension, dividend income, SS t 62, IRA as needed.
? ORP, FIREcalc, or Quicken or plain old pencil and paper and add up the individual calc.'s.
Just now starting to ponder the model. Any Suggestions?
Case 1. Roth 10k per year to age 70 and pay taxes from dividend steam - and spend down taxable pot as necessary. Take SS at 70.
Case 2. Spend each income stream as it comes to bear - fixed pension, dividend income, SS t 62, IRA as needed.
? ORP, FIREcalc, or Quicken or plain old pencil and paper and add up the individual calc.'s.
Just now starting to ponder the model. Any Suggestions?
newellcr
Recycles dryer sheets
- Joined
- Aug 26, 2003
- Messages
- 224
Uncle Mick,
I'd recommend MS excell or another spreadsheet program if you have it. It can handle all of the calculations you need and you can change the variables to quickly see how it effects the outcome. No pencil or paper needed.
Did you run the SS calculator to see what you get at 62, 65, and 70? You can easily do the math to see how long it takes to make up for the lost benefit if you take it at 62. It's kind of morbid, but see how long you have to live to make out by holding off on the benefit until 65 or 70...
I would think you would want to base your IRA withdrawl on your health considerations. Do you expect to be healthy enough at 70 to use the extra income? Or do you expect to need the IRA to fund some health care if needed? You say you are single, do you need to save the money for some other reason than your pleasure? If not, enjoy it now.
Kind Regards,
Chris
I'd recommend MS excell or another spreadsheet program if you have it. It can handle all of the calculations you need and you can change the variables to quickly see how it effects the outcome. No pencil or paper needed.
Did you run the SS calculator to see what you get at 62, 65, and 70? You can easily do the math to see how long it takes to make up for the lost benefit if you take it at 62. It's kind of morbid, but see how long you have to live to make out by holding off on the benefit until 65 or 70...
I would think you would want to base your IRA withdrawl on your health considerations. Do you expect to be healthy enough at 70 to use the extra income? Or do you expect to need the IRA to fund some health care if needed? You say you are single, do you need to save the money for some other reason than your pleasure? If not, enjoy it now.
Kind Regards,
Chris
C
Cut-Throat
Guest
I have run similar SS calculations. I assumed a return of 6%. Taking my full SS at 66 instead of 62 - I come out ahead at age 92! - I'm not betting on this one at all. I'm taking it at 62. I know of no one that delays their SS until 65 or 66 unless they are still working - And then tax reasons make sense to delay it!
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I have webtv but have access to a spreadsheet program on a friends computer. My file of yearly SS statements has numbers to use. Preliminary hand held calculator numbers show age 62 the best option also - breakeven way past 84.3 - my old IRS drop dead date.
I'm leaning towards mix and match my cases 1&2 by Rothing in years when we can't find things to spend on and spending 'while we're young' when opportunity strikes.
Rohing some chunks for 24 years hence - just in case the IRS is wrong about 84.3 - ho ho ho!
I'm leaning towards mix and match my cases 1&2 by Rothing in years when we can't find things to spend on and spending 'while we're young' when opportunity strikes.
Rohing some chunks for 24 years hence - just in case the IRS is wrong about 84.3 - ho ho ho!
C
Cut-Throat
Guest
Don't quite follow you here - Unclemick - What is the IRS drop dead date?
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I don't know the exact title but my life expectancy back in the 1990's according to the IRS was 84.3 years ?pub. 550 I think when I was reasearching before 591/2 withdrawals, minimum withdrawals at 701/2 and IRA's in general. The 84 was OK, but the 0.3 tickled my funny bone.
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