Fixed income strategies

[mathjak107]

to get 5k in a roth take about 6200 hypothetically in pretax dollars .

if that roth doubled tax free you have 10k tax free


however if i bought the same investment in that traditional account i would have the full 6200 working

if the 6200 doubled i have 12,400 less taxes is 10k .


so the tax effect really isn’t ever gone ….it just is buried in the actual cost of that roth and forgotten about since it vanishes in our minds from the original number involved.

but that tax effect is always there ,we just tend to view it in our minds once the taxes are paid up front and forgotten about.

hypothetically you just could have had more working for you if it wasn’t a roth but a traditional

there are other reasons a roth can be beneficial but this tax effect is always there whether we recognize it or not

a roth vs a taxable account would be a different issue as well since the price of admission to both is the same price and the roth saves on those future taxes

so there are different situations here… but in all cases there are taxes to deal with either in advance or after..there ain’t no free lunch where an investment is tax free unless it fits in the zero capital gains bracket.

or i can have an investment like my berkshire in my taxable account and the kids inherit it tax free


otherwise everything is effected by taxes up front or after either effecting our future balance or current one

 

[Out-to-Lunch]

I agreed with you that you were right if the TIPS were held outside of a Roth that they would be guaranteed to fall behind inflation after taxes. .

I don't even agree with this. This Roth-vs.-non-Roth is a red herring to Mathjak's statement.

Right now, TIPS are yielding ~2% real. Let's say that inflation is 3%. So the nominal yield will be 5%. Let's consider holding the TIPS outside of a IRA, in a normal brokerage account. (Note that I do not think that is a good idea due to the phantom income problem, but that is besides the point.)

Mathjak's "point", I believe, was that taxes mean that the real yield will fall below inflation. But this is not necessarily true. Let's say you put $10k into TIPS at a 5% nominal yield, and you are in the 22% bracket. After a year, you have $10.5k, but owe taxes on $500. You are left with $10,390. Due to the 3% inflation, this is only worth ~$10,080 in last year's dollars. But you did NOT fall behind inflation.

When the real yield of TIPS was 0%, as it was for some long while, it was true that their after-tax value would not keep up with inflation. But that is not the case right now.

 

[mathjak107]

personally i would never take up valuable roth space with tips.

only my most growth oriented holdings would be in my roth at any point if my life

 

[pb4uski]

I don't even agree with this. This Roth-vs.-non-Roth is a red herring to Mathjak's statement.

Right now, TIPS are yielding ~2% real. Let's say that inflation is 3%. So the nominal yield will be 5%. Let's consider holding the TIPS outside of a IRA, in a normal brokerage account. (Note that I do not think that is a good idea due to the phantom income problem, but that is besides the point.)

Mathjak's "point", I believe, was that taxes mean that the real yield will fall below inflation. But this is not necessarily true. Let's say you put $10k into TIPS at a 5% nominal yield, and you are in the 22% bracket. After a year, you have $10.5k, but owe taxes on $500. You are left with $10,390. Due to the 3% inflation, this is only worth ~$10,080 in last year's dollars. But you did NOT fall behind inflation.

When the real yield of TIPS was 0%, as it was for some long while, it was true that their after-tax value would not keep up with inflation. But that is not the case right now.

+1. Good point and a good illustration that proves it. Hopefully mathjak can follow the math that with any positive real return that even after taxes TIPS outpace inflation as you've illustrated so his prior post was wrong.