MrBeaver wrote: ↑
Mon May 21, 2018 10:49 am
The point is that while LTCG rate on qualified dividends 'seems' lower than ordinary income tax rates, it's actually a tax paid on top of the ordinary income tax paid on the dollars used to purchase the investment in the first place.
You are forgetting that having identical holdings in taxable and tax-deferred requires a different amount of original income to invest because of the original income taxes.
I'm not sure if we are in disagreement or not, but thought I'd take one more run at it. I may well be the one using terminology that isn't right & look to be corrected as that occurs. One stumbling point I've had: to me there is a tax rate for dividends and another for capital gains, Each of those have variations (qualified vs ordinary, long term vs short term, etc). Under current tax law
, these happen to be the same, but I believe that has not always been the case (& may not be in the future?). But, that isn't the main difficulty I have in following your points. I excised out a couple of sentences & start with the 2nd one 1st.
I would agree that if identical dividend-paying stocks were bought at the same price & time & one put in a brokerage account & the other in a tax-deferred account, & then if the regular account paid taxes each year, then after 40 years the 2 accounts have different amounts. In essence, the tax-deferred account has a "pending tax" component. So, I didn't forget that & my last sentence of previous post I was trying to say that I understood the difference in getting there.
But your comment about a "tax paid on top" that I stumble on. To me, the 2 paths under discussion do not change "what" is taxed, but mostly "when" it is taxed. By changing when, it can (likely will) affect the tax rate applied. The difference in rates isn't known upfront & varies based on ones circumstances. In the above example, during the 40 years the taxable account would have perhaps paid different dividend tax rates as tax law changes and their income bracket changes.
The point on "conversion" (& I only use that term since it has been used upthread) is that there is also a classification change that applies when a distribution is taxed from a tax-deferred account. Whether that is a move up, down, or neither varies.
At the risk of muddying things more, consider the affect when the investor dies. While not always the case, in many or most cases there is a step-up in basis for assets outside the tax-deferred account. Any capital gain is wiped out. The tax-deferred account doesn't get a basis change & tax will be due based on the new recipient.