Date: Mon, 7 Feb 2005 15:39:06 CST
From: "Bucky" 
Newsgroups: misc.invest.financial-plan
Subject: Re: Simple Investment Question Part II
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herlihyboy wrote:
> I know there is a tax incentive in there, but if I invest in non-IRA
> mutual funds and never draw money out until I retire, what are the
tax
> differences from if I invest in traditional IRA mutual funds?

For this example, let's use a mutual fund that has zero growth in
market value but returns 10% in dividends each year. We'll assume
investing $1000 for ten years, reinvesting all dividends, with a 25%
tax rate.

After ten years, in a tax-deferred account, you will have $2594. If you
sell it, you will have a gain of $1594, so you have to pay $1594 * 0.25
= $398 tax, leaving you with a $1195 gain after tax.

In the taxable account, you have to pay the tax on your dividends each
year instead of at the end. After the first year, you get $100 in
dividends, but you pay $25 in tax, so your total value is only $1075
after the first year. This diminishes the compounding. Put these values
in an Excel spreadsheet, and you will find that after ten years, your
value will be $2061, for a gain of $1061. This is slightly less than
the after-tax gain for the tax-deferred account.