User talk:Assumer/Sandbox

From Bogleheads
Revision as of 23:57, 26 March 2013 by Assumer (talk | contribs) (Added some discussion on the tax-loss-harvesting page which motivated my original idea.)
Jump to navigation Jump to search

The benefit of tax deferral is actually much greater than this, because most tax-deferred accounts come with a subsidy on contributions. Your example appears to be a comparison between a $10,000 bond investment in a taxable account versus a non-deductible IRA; the benefit of a deductible IRA is much greater because you could put $13,333 in the deductible IRA for $10,000 out of pocket. Grabiner 16:50, 26 March 2013 (CDT)

I agree. I was trying to make the case just for tax deferment itself (so an apples-to-apples comparison could be made), regardless of extra "bonuses" that come from benefits such as deductible subsidies. Perhaps we can show a few more columns in the table, for deductible and tax-deferred investments? --Assumer 22:50, 26 March 2013 (CDT)

However, it would be possible to make a similar table to show the benefit of tax-deferral within the same account, comparing the returns for a stock fund returning 8% a year which is all qualified dividends and realized long-term gains, versus a fund returning 8% a year which is 2% qualified dividends and the rest unrealized gains (so that 3/4 of the income is tax-deferred). Grabiner 16:50, 26 March 2013 (CDT)

Good idea. --Assumer 22:50, 26 March 2013 (CDT)

The intuitive explanation I use is that $1000 in taxes deferred for 30 years can be invested to be worth much more than $1000 when you finally pay the tax. Grabiner 16:50, 26 March 2013 (CDT)

So I would actually argue that it is not intuitive. The reason I am considering adding this subsection to the page was that I originally thought to myself, "Well, the tax rate is the same (25%). So whether that tax gets taken out each year from the yearly returns, or one large chunk at the end, the final result would be the same." In fact, the reason I created this table was to determine if that was correct or not. --Assumer 22:50, 26 March 2013 (CDT)

I also was thinking about inflation, and I'm not sure how that fits into it. I was originally thinking that the total taxed amount was going to be the same, and if I am going to get taxed a total $150 for year 1, it's better to wait 5 years to pay the tax (i.e. advantage: tax deferred), until that $150 isn't worth as much. Taking it out now means that much fewer groceries I can buy than if I took out the $150 after the 5 years. Thoughts on that? Forgetting about the fact that the total amount taxed is less, as I showed in the table, the simple fact of paying the taxes later means they will likely have less purchasing power when you finally do pay the tax. --Assumer 22:50, 26 March 2013 (CDT)

The original reason I wanted this information in the page was based on this quote from http://www.bogleheads.org/wiki/Tax_Loss_Harvesting :

"Using tax loss harvesting to offset capital gains doesn't actually eliminate the capital gains taxes you would have paid. Instead, it defers those taxes into the future. (In our example, you will owe more capital gains taxes in the future because you bought back the fund at a cost basis that is $4,000 lower.) However, because future money is worth less than money today, there's a saying in public finance that "a tax deferred is a tax avoided"."

The bolded part was the reason I thought about inflation, and assumed that the total amount of tax paid would be the same. I also have seen that quoted on the forum. Perhaps this explanation also belongs on that page? Or a new page simply on tax-deferred advantages?

--Assumer 22:57, 26 March 2013 (CDT)