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Greetings, Dave, and welcome. You wrote:

<<I have a small dilemma. I plan to sell some stock in the next three months for a substantial short term capital gain. If I sell before the end of the year, I will have to pay capital gains taxes immediately, but my AGI next year would still allow me to contribute to a Roth for Y2K with no effect on my contribution for 1999. If I sell at the beginning of next year, I defer my capital gains taxes for a year, but I would exceed the AGI limits for any Roth IRA contribution. I'm leaning towards the second choice, because I may be able to hold the stock long enough to qualify for long term gain. But I'm not sure if that is worth losing my Roth contribution for Y2K. Any advice would be appreciated!>>

When would you need money from the Roth? $2K compounding for 10 years at 10% annually would grow to $5,187 for a tax-free gain of $3,187. In 20 years, it would grow to $13,455 for a tax-free gain of $11,455. If inflation averaged 3.5% annually, then the present value of those tax-free sums is $2,260 and $5,757, respectively. Thus, one way to evaluate waiting to take a long-term capital gain is to compare your tax savings today against those two numbers. You're just asking yourself if the tax savings today is worth more than the future growth you can get on a $2K contribution to a Roth. So pick your compounding period, rate of return and rate of inflation, and then solve for the present value of the future tax-free growth.

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