The Motley Fool Discussion Boards

Previous Page  
Retirement Discussions / Retirement 

URL:
http://boards.fool.com/venture123belowisanillustrationofwhati14495929.aspx


Subject: Re: Keogh makes No sense for S&P Index??  Date: 3/7/2001 4:07 PM  
Author: bhirs  Number: 90 of 294  
Venture123, below is an illustration of what I believe is the correct calculation. This assumes that all of your assumptions about tax rates and capital gains rates are correct and hold. Scenario 1  With the Keough: I'm in the 33% tax bracket and, over, say a 25 year period, I put $200,000 into my Keogh, and invest it completely in S&P and Total Market Index Funds. Now lets assume that by the time I retire 25 years later, and pull the money out, it has tripled to $600,000. If I'm still in the 33% bracket, (and there is no reason to believe I'll be in a lesser bracket when I retire), then my tax bill will be around $198,000. Good enough, so far. Scenario 2  Taxable Account The $200,000 that I earned over the years would get taxed at 33%, assuming I don't go into a higher bracket, and this would amount to 66,000. So far, so good So I would hold it for 25 years or so and, lets say it triples to $600,000 Here's where you have a problem. You assume that your base with which you money grows is the same $200,000, when it is only $134,000. If that $134,000 Triples to $402,000, you have a capital gain of $268,000  which will give you a tax bill upon receipt of $53,600 for a total of $119,600. ($66,000+$53,600) It will also only give you an aftertax accumulation of $348,400. ($402,000$53,600) Letting your original $200,000 grow tax deferred will give you an aftertax accumulation of $402,000. ($600,000$198,000) While you have paid $78,400 more in taxes, you end up with $53,600 more at the end. There are a lot of numbers here, and I didn't exactly sent this through peer review, so let me know if this is correct and if it is helpful. 

Copyright 19962014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us 