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Old 12-31-2017, 08:50 AM
 
Location: Oceanside, CA
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If you make "too much", you cannot deduct IRA contributions. So... why have an IRA and not a regular taxable account? Are taxes on gains deferred in the IRA even if the contributions aren't deductible?
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Old 12-31-2017, 10:18 AM
 
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because the gains can grow tax deferred . you can also do back door roths with conversions . .
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Old 01-01-2018, 11:07 AM
 
Location: Oceanside, CA
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Quote:
Originally Posted by mathjak107 View Post
because the gains can grow tax deferred.
Thanks.
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Old 01-01-2018, 12:25 PM
 
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Wouldn't a taxable account be more tax efficient than a non deductible traditional IRA since the taxable account would be subject to capital gains vs ordinary income (and no 10% tax penalty if you withdraw early?)? I know this question has come up before and Math had an answer but I can't find it.
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Old 01-01-2018, 01:21 PM
 
Location: Oceanside, CA
1,744 posts, read 832,321 times
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Quote:
Originally Posted by UntilTheNDofTimE View Post
Wouldn't a taxable account be more tax efficient than a non deductible traditional IRA since the taxable account would be subject to capital gains vs ordinary income (and no 10% tax penalty if you withdraw early?)? I know this question has come up before and Math had an answer but I can't find it.
Good point! Thanks for raising it.
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Old 01-01-2018, 01:37 PM
 
64,687 posts, read 66,183,819 times
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Quote:
Originally Posted by UntilTheNDofTimE View Post
Wouldn't a taxable account be more tax efficient than a non deductible traditional IRA since the taxable account would be subject to capital gains vs ordinary income (and no 10% tax penalty if you withdraw early?)? I know this question has come up before and Math had an answer but I can't find it.
likely not .

the problem is dividends , distributions and capital gains can all take it's toll over time and destroy any tax savings ...

it is not a slam dunk as to your outcome and it is very individualized as to each situation .

on the other hand the deferred taxes on any gains and dividends and distributions can surpass the special rates .

the only clear cut winner is if you are in the 15% tax bracket and qualify for zero capital gain taxes .
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Old 01-01-2018, 05:28 PM
 
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Quote:
Originally Posted by mathjak107 View Post
likely not .

the problem is dividends , distributions and capital gains can all take it's toll over time and destroy any tax savings ...

it is not a slam dunk as to your outcome and it is very individualized as to each situation .

on the other hand the deferred taxes on any gains and dividends and distributions can surpass the special rates .

the only clear cut winner is if you are in the 15% tax bracket and qualify for zero capital gain taxes .
So I wanted to check this out, and assuming I did my math correctly, under the following assumptions this is what I found:

(1) Use the 2017 Income/Cap Gain Rates
(2) Assume all Cap Gains, No Dividends
(3) Tax brackets are the same across time--when gains are earned or pulled/realized from the tax deferred account
(4) Pretax return is positive each year for 6 consecutive years and the returns are same between the taxable and tax deferred accounts.

Under these limited assumptions, the taxable account would have a higher after tax value for folks in the 10, 15, 33, and 35% brackets. If you are in the 25, 28, or 39.6% brackets, the tax deferred account leaves you with more cash.

To the extent that your total gains are made up of capital gains, and dividends, the greater the share that comes from dividends makes the tax deferred account more attractive (which I think makes intuitive sense because you pay the same rate on dividends regardless of the account classification, but you get the benefit of more compounding in the tax deferred account). Also, the differences are relatively small for the 25% tax bracket and above, but as you pointed out, are noticeably larger if you are in the 10 or 15% bracket with the 0% associated cap gains rate.

So in short, it appears to me that in general, the lower your income and the more of your returns that come from capital gains, you get more benefit from keeping your investments in a taxable account.
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