Difference between revisions of "User:Assumer/Sandbox"

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(Moved discussion to the discussion page, and removed the list of tax-deferred section.)
(Moved the sandbox material to the tax basics page.)
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Looking for opinions on adding this section to [[Principles of Tax-Efficient Fund Placement#Explanation for the estimated order | Principles of Tax-Efficient Fund Placement (Explanation for the estimated order)]]. See the [[User_talk:Assumer/Sandbox]] page for more discussion.
 
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==Advantages of tax deferment==
 
==Advantages of tax deferment==
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Tax deferment is the process of paying the taxes you owe on an investment in a future year, instead of the current year. 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, in which the taxes you owe on an investment return are paid in year 5, compared to annually.
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What [http://www.bogleheads.org/w/index.php?title=User:Assumer/Sandbox&oldid=35392 used to be here] has been moved to the [[Tax_Basics#Advantages_of_tax_deferment|tax basics]] page. Please redirect comments and discussion there, for in [http://www.bogleheads.org/forum/viewtopic.php?f=5&t=113521 the forum]. --[[User:Assumer|Assumer]] 21:11, 5 May 2013 (CDT)
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This example compares a hypothetical investment of $10,000 in a taxable 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 [[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.
 
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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. In both cases, you pay the tax (25%) on the total return (25% * $3,282 = $821, 25% * $3,382 = $846) but in the tax-deferred example, you were able to accumulate more of a return before taxes had to be paid.
 
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{| class="wikitable" style="margin: 1em auto 1em auto; text-align:center"
 
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|+  Table 1. Tax Deferment
 
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!rowspan="2" scope="col"|Year !! rowspan="2"|Return !!rowspan="8" scope="col"|  !! colspan="4"|Taxable !!rowspan="8" scope="col"|  !! colspan="4"|Tax-Deferred
 
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! Tax Rate !! Return !! Taxes !! Total !!  Tax Rate !! Return !! Taxes !! Total
 
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! 0
 
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| - || - || - || - || $10,000  || - || - || - || $10,000
 
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! 1
 
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| 6% || 25% || $600 || $150 || $10,450 || - || $600 || - ||$10,600
 
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! 2
 
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| 6% || 25% || $627 || $157 || $10,920 || - || $636 || - || $11,236
 
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! 3
 
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| 6% || 25% || $655 || $164 || $11,412 || - || $674 || - || $11,910
 
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! 4
 
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| 6% || 25% || $685 || $171 || $11,925 || - || $715 || - || $12,625
 
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! 5
 
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| 6% || 25% || $716 || $179 || $12,462 || 25% (of total return) || $757 || $846 || $12,537
 
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! colspan="12"|
 
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! Total
 
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! || || 25% || $3,283|| $821 || $12,462 || || 25% || $3,382 || $846 || $12,537
 
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|}
 
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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. Having a tax-deferred account has returned $75 more than a taxable account.
 

Revision as of 22:11, 5 May 2013

Advantages of tax deferment

What used to be here has been moved to the tax basics page. Please redirect comments and discussion there, for in the forum. --Assumer 21:11, 5 May 2013 (CDT)

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