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Subject:  Re: nondeductible IRA - Useless? Date:  12/22/2004  10:50 AM
Author:  ziggy29 Number:  43678 of 88527

>> Suppose some folks, like me, believe their post-retirement ordinary income tax rate will be 15%? On the surface this would appear to be a wash/wash scenario with a 15% capital gains rate, but it's not. One has to take into account the value of the tax deferment on the gains--paying 15% now, as opposed to 15% 30 years from now can make a difference--for 30 years one has the availability of the $ to invest and compound that would have gone to pay tax. <<

You are absolutely right using current tax policy as your assumption.

But to me, even if I'm in that position, given that I suspect that as I grow older tax rates will generally rise and preferential treatment of some income will generally be reduced or eliminated (largely because of spiralling deficits and aging of society), I'd rather lock in a 15% tax rate now on some gains, figuring that most likely, it WILL be higher when I take it out. Even over a 20-30 year period at a 8-10% rate of return, even a 20% tax rate on withdrawal would make the nondeductible IRA a worse deal unless you churn stocks almost annually and incur a cap gains tax almost every year.

To some degree, retirement planning is not only about how the tax laws affect us today, but how we think they might hit us in the future. I think I'd prefer the certainty of a known low long-term cap gains tax rate today to an unknown, probably higher tax rate on ordinary income 20-30 years from now. But that's just me; your mileage, of course, may vary. Though I suspect that given the market's well-known hatred of uncertainty, I'm not alone.

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