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
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.
This example 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.
|Tax Rate||Return||Taxes||Total||Tax Rate||Return||Taxes||Total|
|5||6%||25%||$716||$179||$12,462||25% (of total return)||$757||$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
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