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danielrh Date: 3/14/99 12:42 PM Number: 9119
I am trying to determine if a non-deductible IRA will be better than a standard brokerage account as a savings vehicle for retirement.

You are going to have make some assumptions to answer this. Here's the answer for one set of assumptions:

Assume capital gains tax will always be 20% for you.
Assume regular income tax rate will always be 30%
Assume you have 15 years of investment horizon.
Assume you can earn 20% on your investments, all capital gains.
Assume you will realize all of your gains every year.

Then for every dollar invested in an IRA today you will have (1.20)^15 = 15.407 dollars in 15 years. You will pay 30% of the growth = 0.30*14.407=\$4.322, leaving you with \$10.085 after taxes from the IRA.

In the taxable account, each year a dollar will result in 0.20 profit, and you will pay 20% of that, or 0.04, in tax every year. So the taxable account will grow at 16% per year after taxes. In 15 years, each \$1 now will become 1.16^15=\$8.266.

So for this set of assumptions, the IRA is a much better investment. Invent a dozen or so scenarios that seem possible for you, and repeat the calculation.

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