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Subject:  Re: IRA for post 65 yr olds Date:  12/6/2010  12:27 PM
Author:  Goofyhoofy Number:  67796 of 81553

Moving to a taxable account is wrong on so many levels it is hard to know where to start.

Yes, yes, yes.

Suppose you have $100,000 in an IRA. For the sake of easy numbers, suppose you can get 10% on it. (I wish!)

After a year (year 2), you have $110,000. In the next year (year 3) you get $11,000 interest, for a total of $121,000. In year four you get $12,100 interest, for a total of $133,100.

Now suppose you have it in a taxable account. Again, for easy numbers, suppose the tax is 20%. Year one, you have $100,000. Your 10% interest yields $10,000, but you give $2,000 in taxes. So in year two you start with $108,000. Earning 10% in year three, you get an additional $10,800, of which $2,040 goes in taxes. Now you have $108,000 plus 8,040, or $116,040. One more year, to make the comparison even: you get $11,604 in interest, and you give back 20% to taxes, for an increase of $9,284, or a total of $125,384.

What's the difference between $133,000 and $125,384? The taxes that you paid along the way. You have lost around $8,000 that you would have otherwise had.

This example ignores the fact that you have to pay taxes somewhere along the line, so look at that for a moment. Again, let's - for the sake of easy numbers - say the bite will be 20%.

If you have $100,000 and you pay taxes on it immediately, you will have $80,000 to work with. In year one, that $80,000 will produce $8,000 of increase.

If you don't pay taxes on it immediately, you will have $100,000 to work with. That $100,000 will produce $10,000 of increase. You are ahead by $2,000, which will compound year by year until you do finally withdraw it.

Yes, at that point you will have to pay taxes, but wouldn't you rather pay slightly more taxes on much more principal than pay fewer taxes on much less?

Unless that tax laws change dramatically, or your personal situation will move you into a much higher bracket when you retire (which is the opposite of what usually happens), you are almost always better off deferring taxes until later.

(There may be a few exceptions, for instance I am considering moving some Traditional IRA monies into a Roth IRA and "paying taxes" on it now. Except oops, my income for this year is very small, so the amount I move will require me to pay taxes on an amount below which I am not required to pay taxes. Therefore my "pay taxes" will be zero, even though I am doing something which supposedly requires me to "pay taxes.")
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