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flawed? ha ha ha i don't think so.... maybe someone else can explain it to you.
Are you saying that because you are absolutely sure that you are never wrong or because you have actually read and thought about my posts and seen an error in my computation?
your individual computations do not apply when used together in combinations. if you were comparing them individually yes but not for the purpose of what is being discussed.
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 .
Let me paraphrase this because your grammar is a little difficult for me to understand. Suppose you have 5k pre-tax to invest in bonds and 5k pre-tax to invest in equities:
If the brokerage account gets the bonds and the Roth gets the equities, the bonds including principal and interest get taxed at 39.5%, and the equities get taxed at 39.5% on the capital only.
If the brokerage account gets the equities and the Roth gets the bonds, the bonds get taxed at 39.5% on the principal only, and the equities get taxed at 39.5% on the capital and 20% on the capital gains.
Is that what you're saying? Tell me if read that right.
Yes but a roth can work out either way . If markets are weak like the lost decade then yes bonds in the roth and equites in the taxable will be better.
If markets are strong the equities may work better in the roth.
However the traditional ira will always work better with the bonds in the ira and the equities in the taxable.
Yes but a roth can work out either way . If markets are weak like the lost decade then yes bonds in the roth and equites in the taxable will be better.
If markets are strong the equities may work better in the roth.
Sure. I agree. But you agree with my paraphrase. Let's move on.
Quote:
Originally Posted by mathjak107
However the traditional ira will always work better with the bonds in the ira and the equities in the taxable.
Now let me paraphrase what you said about this.
Suppose you have 5k pre-tax to invest in bonds and 5k pre-tax to invest in equities:
If the brokerage account gets the bonds and the Traditional IRA gets the equities, the bonds including principal and interest get taxed at 39.5%, and the equities get taxed at 39.5% on the capital and 39.5% on the capital gains.
If the brokerage account gets the equities and the Traditional IRA gets the bonds, the bonds including principal and interest get taxed at 39.5%, and the equities get taxed at 39.5% on the capital and 20% on the capital gains.
Sure. I agree. But you agree with my paraphrase. Let's move on.
Now let me paraphrase what you said about this.
Suppose you have 5k pre-tax to invest in bonds and 5k pre-tax to invest in equities:
If the brokerage account gets the bonds and the Traditional IRA gets the equities, the bonds including principal and interest get taxed at 39.5%, and the equities get taxed at 39.5% on the capital and 39.5% on the capital gains.
If the brokerage account gets the equities and the Traditional IRA gets the bonds, the bonds including principal and interest get taxed at 39.5%, and the equities get taxed at 39.5% on the capital and 20% on the capital gains.
Tell me if I read that right.
Quote:
Originally Posted by mathjak107
Great! Now, here's the thing.
On the surface, it sounds like putting the equities in the brokerage account (and bonds in the Traditional IRA) is a better idea because you only get taxed 20% on the capital gains. In reality, it is a worse idea because you are paying two layers of tax on the capital. The difference is in the timing of the 39.5% income tax.
Because the taxes on bonds are exactly the same in both scenarios, it is only necessary to compare the tax on the equities.
With the equities in the brokerage account, you pay the 39.5% up front. This reduces your capital base by 39.5% right from the start. Compared to someone that goes with the Traditional IRA option, you are short by 39.5% from the beginning. Let's assume for now that you don't pay capital gains tax. You are always short by 39.5% no matter how much the capital gains are as long as your equities and his are growing at the same rate. (Imagine this: I have 1 dollar and you have 2. After one year our money both doubles, so I have 2 and you have 4. You always have twice as much as I do). The shortfall is made up when the Traditional IRA guy pays his 39.5% tax on everything he has. Now, you and the Traditional IRA guy have the exact same amount of money.
Now, unfortunately, you actually have to pay capital gains tax. Before capital gains tax, you are as rich as the Traditional IRA guy. Since you have to pay capital gains tax, you actually end up with less money.
your math is 100% correct and your theory would be 100% right except for one factor.
the limitations on the ira's prevent you from taking advantage of putting in that extra 39.5% in pretax dollars you have .
once you put 5k in the taxable the most you can get in the ira is 5k too ,not the full 8200 you really have in pretax dollars to take advantage of. .
your numbers would hold true if you put 5k in the ira and only 3200 in the taxable. then pretax dollars would be equal .
but you want 5k in each and the ira is only capable of taking the same 5k not the 8200 you really have for investing..
as soon as you use real numbers starting at 5k in the taxable account the equation is very different from the pure math because of that damn limitation and the inability to utilize that extra money in the ira..
Last edited by mathjak107; 02-10-2014 at 06:57 PM..
your math was always correct , it just couldn't play out because you can never deploy the extra money in the ira because of the limits..
if you think how it actually works out in this case : you make the 5k contibution and you either get back the tax savings in a check or pay less in taxes when you mail them in in ,pretty much that difference sits where? in your taxable account. in reality it is part of the 5k being invested into the taxable account .
it never gets in the ira to be used when you are doing a combo thing.
Last edited by mathjak107; 02-11-2014 at 04:19 AM..
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