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URL:  http://boards.fool.com/tmfpixy-wrote-ltlthence-i-dont-think-my-use-10096435.aspx

Subject:  Re: Roth IRA Contriubtions & Conversions Date:  2/2/1998  7:46 PM
Author:  Kilmarnoch Number:  1599 of 75539

TMFPixy wrote:
<<Hence, I don't think my use of marginal rates in this computation is either "bogus" or inappropriate. But I do think your use of effective rates is. <g> >>

That pretty much sums up my whole post, doesn't it?

It looks like the way I was trying to use effective rates for rebate calculations is all wrong, it turns out the different between my "effective rebate" and the real $560 rebate is always accounted for in the *change* in effective rate (deducting versus not deducting). Since I was using the same idea in that entire post I expect anyplace that involved a rebate is completely wrong.

<<You are obviously an advocate of effective tax rates>>

Actually I've not an offical advocate... haven't received my membership badge yet =). I hopped on that idea about a week ago... from you reply I see that it doesn't work some in places I've been using it, I need to think about it more.

The last few charts that didn't involve rebates (that used effective rates) might still be useful...

I'll still try to figure out a "roth-ify" formula based on time, tax rates and return rates... one must exist.

================

there is something that still might be worth asking:

given a taxable investment earning 9%, 30% is dividend income (taxed at 28% marginal rate), 70% is long term capital growth (20%).

I wrote:
<<I think the 8.244% return per year on the after tax account is bogus... here's my math:

return = (rate * 70%) ... taxed at capital gains rate + (rate * 30%) ... taxed at effect tax rate >>

TMFPixy replied,
<<I'm sure it makes sense to you to use effective tax rates here, but it doesn't to me. Again, the example has John in the 28% marginal rate. If the $560 per year earned a taxable dividend during the year, because of his marginal rate John would pay $0.28 on each dollar earned.>>

okay I agree, 28% on the dividends (not 22.6) and 20% on the capital gains. wouldn't that mean a still lower the after tax yield on a 9% investment:

return = (yield * 70%) ... taxed at capital gains rate + (yield * 30%) ... taxed at marginal rate.

so something like:
6.984 = (9 * .7 * .8) + (9 * .3 * .72)

after all if you are earning 9% and you get taxed at 20% on the whole investment you keep 80% of the "growth"... 9 * .8 == 7.2. How can someone who is being taxed at 20% and 28% expect a higher 8.244% return?

(8.244 / 9 = 91.6%, meaning the gov't only gets 8.4% of the yearly yield??? ... i must be missing something.)

Thanks
--Kilmarnoch
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