Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 1
Venture123, below is an illustration of what I believe is the correct calculation. This assumes that all of your assumptions about tax rates and capital gains rates are correct and hold.

Scenario 1 - With the Keough:

I'm in the 33% tax bracket and, over, say a 25 year period, I put $200,000 into my Keogh, and invest it completely in S&P and Total Market Index Funds. Now lets assume that by the time I retire 25 years later, and pull the money out, it has tripled to $600,000. If I'm still in the 33% bracket, (and there is no reason to believe I'll be in a lesser bracket when I retire), then my tax bill will be around $198,000.

Good enough, so far.

Scenario 2 - Taxable Account

The $200,000 that I earned over the years would get taxed at 33%, assuming I don't go into a higher bracket, and this would amount to 66,000.

So far, so good

So I would hold it for 25 years or so and, lets say it triples to $600,000

Here's where you have a problem.

You assume that your base with which you money grows is the same $200,000, when it is only $134,000.

If that $134,000 Triples to $402,000, you have a capital gain of $268,000 - which will give you a tax bill upon receipt of $53,600 for a total of $119,600. ($66,000+$53,600)

It will also only give you an after-tax accumulation of $348,400. ($402,000-$53,600)

Letting your original $200,000 grow tax deferred will give you an after-tax accumulation of $402,000. ($600,000-$198,000)

While you have paid $78,400 more in taxes, you end up with $53,600 more at the end.

There are a lot of numbers here, and I didn't exactly sent this through peer review, so let me know if this is correct and if it is helpful.
Print the post  


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.