intercst,The capital gains break is only for federal tax. The holding period does nothing to reduce state income tax, which is significant in California (9.3% top bracket).If I go with the taxable account, all my capital gains are long term and I will pay 15% federal tax and 9.3% state tax on them. The net tax will be 9.3 + (100 - 9.3) * 0.15 = 22.905% .If I go with the non-deductible IRA, my withdrawals will be ordinary income when I retire. My average federal tax rate today is 17.88% according to turbotax. My average state tax rate is 6.5%. That's 24.38% average.The difference between the two is seemingly 1.4% in favor of the taxable account.But I expect my withdrawals to be at least 20% smaller than my wage income when working. In fact, it can be about 8% smaller without feeling anything, because I won't have any social security or medicare taxes to pay on my IRA withdrawals, which I now pay on my wages. And it can probably be another 12% smaller when the house is paid off realistically. So, I think this difference would easily account for a 1.4% lower overall tax rate - the difference between the two scenarios - and possibly more.In fact the tax rate could be even lower, because the IRA withdrawals will be made of both contributions and capital gains/dividends. The contributions are previously taxed, thus not taxable. This further reduces the total taxable income in retirement, and thus the average tax rate. I would expect at least 20% of the withdrawals to be previously-taxed contributions, and 80% of the withdrawals to be capital gains/dividends/interest.Of course, the above is assuming that the tax rates stay the same over the long term. There is no way to predict what tax rates and rules will be 20+ years from now. If the tax rates go up significantly over the long term, then paying the tax now makes more sense.
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