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I guess the real question(s) boils down to: Will the tax deferred growth of the non-deductible IRA outweigh the benefits of only paying capital gains on the std. brokerage account?

I constructed a rather simple model using an Excel spreadsheet to handle this particular problem, because I haved faced much the same kind of decisions regarding both my regular brokerage account and two IRA accounts (one rollover with some non-deductible contributions and another SEP/IRA account.

The model I used made the following assumptions:
Investment Return 25% per year.
Tax Rate 36% LTCG Rate 20%
Investment Horizon 20 years.
Initial Investment $10,000.
Because of the time horizon, the addition of $2,000 in non-deductible contributions tends to be diminished by the overall return of the portfolio.

I then made one additional model which assumed that the balance would continue to be invested for 10 more years and withdrawn on a declining balance until exhausted at the end of 10 years, with appropriate tax rates.

Based on this model, the tax-deferred portfolio fares much better than the standard portfolio in most instances. The exceptions occur when portfolio turnover is reduced to 10 years or more. In other words, if you can buy & hold the stocks in your portfolio for at least 10 years before incurring capital gains taxes, you will have an ending portfolio that will produce larger payments than the IRA portfolio when withdrawn over 10 years. In all other cases, the IRA portfolio produces larger payments.

The typical example might be a FF portfolio which reinvests in a new set of stocks each year. In this instance, you can expect that the IRA portfolio will produce almost $230,000 more in payments over the 10 years than the regular portfolio. If held for a longer investment period, say 30 years, before drawing down the portfolio, the difference would be even more dramatic.

As one of the posters earlier indicated, portfolio turnover will be the key to which kind of account to use. For those in which turnover will be made every year, the IRA will be king; for long-term (at least 10 years) buy & hold, the regular one will be better.

In the case of the woman who started with $5K in 1944 and amassed a fortune of $44 million, no sales were ever made. This was the ultimate buy and hold strategy. An IRA would be left with about $28 million and a regular investor with $35.2 million. Turnover makes the difference.

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