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Subject:  Re: Keogh makes No sense for S&P Index?? Date:  3/7/2001  4:07 PM
Author:  bhirs Number:  90 of 315

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 after-tax accumulation of $348,400. ($402,000-$53,600)

Letting your original $200,000 grow tax deferred will give you an after-tax 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.
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