Date: Tue, 8 Feb 2005 04:08:27 CST
From: "JJ" 
Subject: Re: Simple Investment Question Part II
Newsgroups: misc.invest.financial-plan
	iQBVAwUAQgiPm/l/I4+O31e5AQHgrwIAmrGSxj4XDcq4zmksLVlKWMT4FBKeIde/
	ZcsUuHGHFKcDHdUaqF2OXp/tXaQAXcGnSef6PI1VRl2aaop6RZ5FMA==
	=tSIr

You also have to take into account the ability to use the traditional IRA as 
a tax deduction.

The $1000 is going into the IRA basically as pre-tax dollars, where the 
non-IRA is using after-tax dollars.

(Assuming the IRA is deductible.)

"Bucky"  wrote in message 
news:1107812266.238492.223290@z14g2000cwz.googlegroups.com...
> 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.
>