No. of Recommendations: 0
You need to rethink your figures that you're using. If one in investing something that can produce 12% rate of return (apparently equities), one is not going to be taxed at their marginal tax rate as all the earning is not taxable . . . nor might it be all ordinary income taxable . .. right?


Thanks for the question. The table is pretty dense with information, and maybe I did get it wrong, but I did apply the capital gains rate of 20% to the taxable portfolio. And even that was only applied to the gains, using the average cost method. It might be possible to delay the taxes a bit by using a different method.

It was the tax deferred portfolio where I used the marginal tax rate of 28%. It's my understanding that that is how Traditional IRA's and 401k's work. I don't know about 403b's.

. . . . They found that in mutual fund taxes shaved from 1.5% to a little over 3 percentage points off the return. So, to account for taxes, you might was to shave 2 points off and use 10% instead of 12% for comparison.

Another good point. That would certainly be true of most actively managed mutual funds, but not of a low turnover index fund like VFINX. (VFINX is indeed the equities investment I had in mind.)

VFINX has been running only 5 to 6% turnover for many years. Last year 6% turnover produced only 1% capital gains distribution. Also, any taxable gains distributions would then be balanced by a rise in the cost basis with resulting reductions in taxes later. Too much complication for a quicky spreadsheet. Anyway, it could only make the taxable portfolio look worse, it wouldn't apply to the tax deferred portfolio. So, it wouldn't affect the conclusion.

I haven't tried different rates of gain, but my intuition says that the higher the average pre-tax gain, the more favorable the taxable portfolio will look. But that's just a guess; I'll plug some number tomorrow and post the results.

The biggest drivers are certainly the marginal tax rate on ordinary income, and the long term capital gains tax rates.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.