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double taxation on traditional IRAs
Topic Started: Apr 7 2010, 06:05 PM (2,389 Views)
jon-nyc
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Kincaid - order this book right now:

http://www.amazon.com/Intelligent-Asset-Allocator-Portfolio-Maximize/dp/0071362363
In my defense, I was left unsupervised.
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John Galt
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Kincaid asked my question, and jon answered it. Thanks to both.

I'm off to my local Border's to pick up the book.

jon, after Kincaid and I finish our reading assignment, can we come back and ask questions? It would be good teaching practice for you in case you decide to head that direction in your next career....

I'm especially interested in fixed income stuff (getting closer to retirement in this family), but I want to do my homework first by reading the book before I ask a lot of questions....
Let us begin anew, remembering on both sides that civility is not a sign of weakness.
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jon-nyc
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Sure, I'm always happy to discuss this topic.
In my defense, I was left unsupervised.
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Kincaid
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HOLY CARP!!!
Got it for $13.38 used.

Cool, the author lives in Oregon.
Kincaid - disgusted Republican Partisan since 2006.
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jon-nyc
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ANd he's not a finance guy originally. He's a cardiologist. But he's a real autodidact and really learned a lot about investing, now he's recognized as an expert in the DIY investment community. Give it a read and we'll chat afterward.
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John Galt
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Back from the library with my copy.

BTW, jon, how are your first few days away from God's work? Does it feel odd to be home?
Let us begin anew, remembering on both sides that civility is not a sign of weakness.
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jon-nyc
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nah, this is the third time I've taken time off in 5 years. :)

But its nice hanging out with the boy!
In my defense, I was left unsupervised.
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Mark
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HOLY CARP!!!
I see a large ship on the horizon.

I don't play the investment game.

Yet.

So off to amazon....

Thanks jon!
___.___
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o 0
When I see an adult on a bicycle, I do not despair for the future of the human race. H.G. Wells
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Free Rider
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jon-nyc
Apr 8 2010, 10:41 AM
Thanks, Jon. My family is hanging on right now, we're living (barely) below our means, which I recall you saying was important to retirement.


I also will have a look at this book.


PS. I look forward to the latest pictures of the little dude. I'm sure you're enjoying the newfound time with your famly. :thumb:
Edited by Free Rider, Apr 8 2010, 12:38 PM.
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John Galt
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This is going to be great!

We'll try not to take too much of your time away from little-nyc.

I second FR's request for more pics. I want the chocolate cake sequel to the watermelon episode.
Let us begin anew, remembering on both sides that civility is not a sign of weakness.
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brenda
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..............
Kincaid
Apr 8 2010, 10:32 AM
Someone that knows please just tell me where to put my money.
I have room inside my mattress, Kincaid. Mail it to me.
“Weeds are flowers, too, once you get to know them.”
~A.A. Milne
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kathyk
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jon-nyc
Apr 8 2010, 02:49 AM
Horace
Apr 7 2010, 06:05 PM
I'm not sure if I'm reading the rules right but it seems like contributions to traditional IRAs are with after-tax money (if you make more than some low income threshold), and the money is taxed again as income upon withdrawal.
You don't pay taxes again on the amount you contributed, just the gain.


If you do the math, you'll find that it doesn't make sense to buy stocks in a traditional IRA (at least not under current tax law). I still max out our traditional IRAs every year and use them for fixed income investments.
This thread has totally confused me. How do you max out your IRAs if there is no limit to how much you contribute? Or is the no limit on the income threshold and the contribution limit still applies? In other words, everyone can contribute the 5 or 6 K (or whatever the annual limit is), but you can only do it with pre-tax $$ if your income is below a certain amount. Is that right?

I'm so glad JF deals with all of this stuff in our household.
Edited by kathyk, Apr 8 2010, 05:22 PM.
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Horace
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yes you have it right KathyK. There are always contribution limits. And IMO ridiculously low ones. Thank goodness for 401ks.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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kathyk
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jon-nyc
Apr 8 2010, 08:10 AM
Right. Lets say you have 1000 in your taxable acct, and 1000 in your TIRA. You buy 1k worth of the same stock in each.

20 years later, you're retired and you've got (say) 5k in each account. You sell the 5k in your taxable and pay 15% cap gains, which is $600 (4k gain *15%). You net 4400. You take a distribution from your TIRA and pay income tax on the 4k gain, say you're in the 25% bracket so that's 1k. Hence you net 4k. (can be worse disparity if you're in the 30 or 33% bracket)


Of course tax laws can and will change, but as long as there's an advantage to cap gains over ordinary income (which seems reasonably likely to persist over time) then you lose out buying sticks in a traditional IRA.

Instead, use your TIRA for investments that are taxed as ordinary income like bonds. Personally I use my TIRA for REITS and TIPS.


(i should point out that the above calculation is simplified - it assumed no dividends or taxable distribution you might get if you owned an equity mutual fund instead of plain equities - still under most scenarios you'll find you're better off holding equity positions in taxable account or in a ROTH, and fixed income in a traditional IRA.
Yes, but most people will only be withdrawing from their IRAs at the MDR (minimum distribution rate), which is roughly 14 -15% of the IRA per annum, so, the tax won't be nearly as dramatic as it would be if the whole IRA was withdrawn, as in your example. One of the rules of thumb I've taken away from IRA seminars I've attended (have you ever listened to Natlalie Choate?) is defer, defer, defer. As long as you can put off income taxation, you're better off, and that's the big benefit of traditional IRAs. That of course extends to the lucky beneficiaries of IRA owners who die before they've depleted them. Plus, most people, (maybe not you and others here) are at a lower tax bracket, not a higher one when they're retired.
Edited by kathyk, Apr 8 2010, 05:23 PM.
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kathyk
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Horace
Apr 8 2010, 05:14 PM
yes you have it right KathyK. There are always contribution limits. And IMO ridiculously low ones. Thank goodness for 401ks.
Good. I learned something here.

Yup, I was shocked and dismayed a few years ago when I learned I couldn't contribute to a traditional IRA. But, I didn't realize that I really could, but there would just be no immediate tax benefit.

Natalie Choate, btw, is *the* national IRA tax law guru, and a really, really entertaining speaker - definitely worth listening to if she's ever hired to speak in your neighborhood.
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Horace
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Yep I love deferring. When one trades in taxable accounts before retirement, generally the tax bracket will be based on a salary so pretty much every penny of cap gains will be taxed at the max rate. But when one takes distributions, either in retirement or because of financial emergency, generally one won't be working at the time and even if the distribution is large, the bits of it up to the higher tax brackets will be taxed at fairly low rates.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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jon-nyc
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Cheers
*duplicate*
In my defense, I was left unsupervised.
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jon-nyc
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kathyk
Apr 8 2010, 05:21 PM
Yes, but most people will only be withdrawing from their IRAs at the MDR (minimum distribution rate), which is roughly 14 -15% of the IRA per annum, so, the tax won't be nearly as dramatic as it would be if the whole IRA was withdrawn, as in your example. One of the rules of thumb I've taken away from IRA seminars I've attended (have you ever listened to Natlalie Choate?) is defer, defer, defer. As long as you can put off income taxation, you're better off, and that's the big benefit of traditional IRAs. That of course extends to the lucky beneficiaries of IRA owners who die before they've depleted them. Plus, most people, (maybe not you and others here) are at a lower tax bracket, not a higher one when they're retired.
It depends on your overall tax rate, if your income puts you in the 25% marginal you'll pay 25% on those withdrawals, whether they're done slowly over time or in one year. I used the one year example to make the illustration clear.


Re defer, defer, defer - I agree, and don't take my post to mean I'm counseling *against* traditional IRAs. I'm not at all. We max ours out every year despite not being able to take any deductions. My point was simply that it makes more sense to put tax inefficient investments like bonds and REITs in your TIRA, leaving equities in your taxable. Of course it depends on one's particular situation, and the relative amounts they have in their tax deferred vs. taxable accounts.
In my defense, I was left unsupervised.
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