Difference between revisions of "User:Assumer/Sandbox"

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Start with $10,000. After year 1, you will have $150 less total return after taxes (compared to the non-taxed amount of $10,600). Going into year 5, you will be starting with a higher amount ($12,625) if the taxes were deferred than not ($11,925). In year 5 (the year where the taxes have been deferred ''to'') you will end up with a higher starting amount, which shows that deferring taxes is the best approach.
 
Start with $10,000. After year 1, you will have $150 less total return after taxes (compared to the non-taxed amount of $10,600). Going into year 5, you will be starting with a higher amount ($12,625) if the taxes were deferred than not ($11,925). In year 5 (the year where the taxes have been deferred ''to'') you will end up with a higher starting amount, which shows that deferring taxes is the best approach.
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====List of Tax-Deferred Accounts====
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'' '''Do we want this section?''' ''
 +
* Traditional IRA
 +
* I-Bonds
 +
* 529
  
 
'''''Editor's note: Did I do these calculations correctly?''''' --[[User:Assumer|Assumer]] 08:14, 26 March 2013 (CDT)
 
'''''Editor's note: Did I do these calculations correctly?''''' --[[User:Assumer|Assumer]] 08:14, 26 March 2013 (CDT)

Revision as of 17:40, 5 May 2013

Looking for opinions on adding this section to http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement#Explanation_for_the_estimated_order

Advantages of tax deferment

It may not be clear why deferring taxes is a good idea, especially if you expect to be in the same tax bracket in the future.

For an example, refer to Table 1. This compares a hypothetical investment of $10,000 in a vehicle (such as a bond or CD) returning 6% annually for 5 years. The investor is assumed to be in the 25% tax bracket both during the investment and the withdrawal stage. A tax-deferred account (such as a non-deductible traditional IRA) waits until the investor withdraws the funds, and then taxes are paid on the entire, cumulative, amount of gains. In a taxable account, the 25% tax is paid each year on the gains for that given year. It can be seen that deferring the taxes yields a final, after-tax amount of $12,537 for this hypothetical investor, while paying taxes each years yields a final, after-tax amount of $12,462.

It should be noted that tax-deferred accounts may have additional benefits (such as a deductible IRA), which this comparison ignores in an attempt to make a more apples-to-apples comparison.

Table 1. Tax Deferment
Year Return   Taxable   Tax-Deferred
Tax Rate Return Taxes Total Tax Rate Return Taxes Total
0 - - - - $10,000 - - - $10,000
1 6% 25% $600 $150 $10,450 - $600 - $10,600
2 6% 25% $627 $157 $10,920 - $636 - $11,236
3 6% 25% $655 $164 $11,412 - $674 - $11,910
4 6% 25% $685 $171 $11,925 - $715 - $12,625
5 6% 25% $716 $179 $12,462 25% (of total return) $757 $846 $12,537
Total 6% 25% $3,283 $821 $12,462 25% $3,382 $846 $12,537

Start with $10,000. After year 1, you will have $150 less total return after taxes (compared to the non-taxed amount of $10,600). Going into year 5, you will be starting with a higher amount ($12,625) if the taxes were deferred than not ($11,925). In year 5 (the year where the taxes have been deferred to) you will end up with a higher starting amount, which shows that deferring taxes is the best approach.

List of Tax-Deferred Accounts

Do we want this section?

  • Traditional IRA
  • I-Bonds
  • 529

Editor's note: Did I do these calculations correctly? --Assumer 08:14, 26 March 2013 (CDT)

How do I put more of a "break" between the taxable and tax deferred columns? Like a double vertical bar? --Assumer 08:14, 26 March 2013 (CDT)

You can get a lot more complicated as shown here: wikipedia:Help:Table#Setting borders, but one simple approach is to insert a non-break space ( ) see wikipedia:List of XML and HTML character entity references. Tables usually ignore spaces, but non-break spaces force the insertion. Note the column spans the table. --LadyGeek 21:12, 26 March 2013 (CDT)

How do I add a break before the final