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it isn't a case of putting the money in a regular taxable account or an ira and taking the tax deduction and seeing which balance is higher . . instead picture you have 10k to invest as an example. you want to put 5k in bond funds and 5k in equity funds for your 50/50 mix.
you are going to put 5k in your ira and take the tax deduction and 5k you are going to invest elsewhere in your regular taxable brokerage account.
I guess we are asking different questions. The question I was answering was: Given 10k pre-tax, what kind of investment account should I contribute to?
If you contribute to a Roth IRA, you have to pay income tax up front before generating any capital gains. Capital gains are not taxed. So the most tax you'd pay is 39.1% of 10k.
If you contribute to a brokerage account, you have to pay income tax up front, and again on any capital gains. So you pay taxes twice on the same amount of money. The most tax you'd pay is 39.1% on the 10k plus 20% on the capital gains from the capital base which has already been hit by 39.1% income tax.
If you contribute to a Traditional IRA, you don't pay any income tax up front, so your capital base is protected, but your capital gains get taxed at the regular income tax rate, maximum 39.1%
So assuming that you don't change tax brackets when you withdrawal compared to when you're earning, Roth IRA and Traditional IRA give you the exact same result.
if you buy the equities through the ira and you buy the income stuff like bond funds through the taxable account you are going to pay regular income rates as high as 39.5 % on BOTH when you sell in the taxable account or withdraw from the ira account .
but if instead you bought the income stuff in the ira and bought the equities in the taxable account you will pay taxes as high as 39.5% on the withdrawals from the ira but only a max of 20% on the equities in the taxable account when you sell.,.
For the 5k in equities to be taxed at income tax rate when you withdraw it, you have to put it in a traditional IRA. So from your scenario, this 5k is pre-tax. This means if you put this 5k in a brokerage account, first it has to be reduced by income tax, and then the capital gains will be taxed at capital gains tax rate. So you are taxed twice, compared to once if you had put the money in an IRA.
Again, 5k pre-tax and 5k post-tax are not the same. You're treating the 5k of equities in the IRA as pre-tax and the 5k of equities in the brokerage account as post-tax.
To do it right you need enough money to fund both the taxable and either the roth or the traditional depending on how it will mesh long term with your social security and medicare taxes.
Since you cannot max out both the roth and the traditional you need to pick one to use with your taxable account.
You can not look at it as either or ,it is used together with a roth or ira.
The taxable account is only taxed once. The principal is taxed when you earn it like all your income is and the gains on it are taxed once at capital gain rates.
Like the roth you give up the gains from the pretax dollars that went for taxes.
The traditional ira is taxed in full once at the end. Not just the gains but the entire amount. That is 39.5% from dollar 1.
The roth is taxed once in the beginning. But you give up the gains as well on the pretax dollars you paid the taxes with.
So getting back to the origonal premise. With 10k you can fund a roth or ira ,not both and you have 5k left for your taxable account.
If you do not do this right by putting the equities in the taxable account you will eventually pay a max of 39.5% on both the traditional ira and the taxable account.
If you put the equities in the taxable account you will pay a max of 39.5% on the ira and 39.5% only on the principal in the taxable account when you earned it and a max of 20% on the gains.
Last edited by mathjak107; 02-09-2014 at 07:07 PM..
The taxable account is only taxed once. The principal is taxed when you earn it like all your income is and the gains on it are taxed once at capital gain rates.
Like the roth you give up the gains from the pretax dollars that went for taxes.
You are still confused. Yes, the capital gains appear to be taxed once, but it has been implicitly taxed before at income tax rate through the reduction of capital base. If you have 5k pre-tax and pay 1k in income tax before contributing to a brokerage account, you are giving up 1k plus all the capital gains that would have been generated off of that 1k. You're better off with a Roth. Don't believe me? Take a calculator out, punch the numbers, and see if the brokerage account and the Roth IRA will give you the same results or not. In fact, I've already illustrated this in math a few posts back, but you ignored it.
Silly,you can only put 5k in the roth. Where are you putting the other 5k.?
You have 10k to invest. You are not following what is being said.
You maxed out the roth and still have more money to invest.
With the roth you won't have the issue of the stocks getting whacked harder then they should. You can put your equities in the roth and its fine and put the bonds in the taxable.
But if you use the traditional ira you certainly will. Mix up what you put in which type of account and it will cost you more in taxes
Yes 5 k in each . Now re-read what i wrote above and you will understand
Don't you think I have read your posts enough times already? Every time you say I'm confused, I go back and re-read. May I ask that you re-read my posts also? They are not that long.
you are gettii8ng to involved in the amounts seperatly and not the combinations working together .
you can only have 2 combinations
taxable and roth or taxable and traditional.
the taxable and roth possibilities would be taxable account gets the equities/ roth gets bonds or taxable account gets the bonds/ roth gets equities.
those are your only 2 combos
if the taxable account gets the bonds it is taxed on everything at a max of 39,5 and the roth at 39.5 on the beginning balance only
if the taxable account gets the equities it gets taxt 39.5 on the origonal amount and only up to 20% on the gains of the equities and the roth 39.5 on the beginning balance only on the bonds .
that can be a toss up as to which will be better ,the long term tax free gains in a good market may beat the lower tax rates in the taxable. but if bonds do better like the lost decade then you would do better with the equities in the taxable.
the traditional ira choices in that combo are bonds in taxable/ equities in ira or equities in taxable /bonds in ira .
bonds in taxable are all taxed a max 39.5 ... ira with equities is all taxed at max of 39.5
equities in taxable ,bonds in traditional
equities taxed at max of 39.5 and the gains after that taxed at max of 20 while ira is taxed at 39.5 max.
clearly in the taxable/ traditional ira the equities in the taxable account / bonds in traditional are a clear no brainer. the taxes are lower much lower just by putting the bonds in the traditional ira.
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Last edited by mathjak107; 02-10-2014 at 04:02 AM..
Instead of rehashing the exact some information over and over again without targeting anything, why don't you actually spend some time reading and thinking about what I said. I understand what you said, and your argument is flawed. I see no effort on your side trying to understand what I wrote, and I see no attempt to correct my math if there was anything wrong with it.
flawed? ha ha ha i don't think so.... maybe someone else can explain it to you.
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