Looking for opinions on adding this section to http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement#Explanation_for_the_estimated_order
Advantages of tax deferment
It may not be clear why deferring taxes is a good idea, especially if you expect to be in the same tax bracket in the future.
For an example, refer to Table 1. This compares a hypothetical investment of $10,000 in a vehicle (such as a bond or CD) returning 6% annually for 5 years. The investor is assumed to be in the 25% tax bracket both during the investment and the withdrawal stage. A tax-deferred account (such as a non-deductible traditional IRA) waits until the investor withdraws the funds, and then taxes are paid on the entire, cumulative, amount of gains. In a taxable account, the 25% tax is paid each year on the gains for that given year. It can be seen that deferring the taxes yields a final, after-tax amount of $12,537 for this hypothetical investor, while paying taxes each years yields a final, after-tax amount of $12,462.
It should be noted that tax-deferred accounts may have additional benefits (such as a deductible IRA), which this comparison ignores in an attempt to make a more apples-to-apples comparison.
|Tax Rate||Return||Taxes||Total||Tax Rate||Return||Taxes||Total|
|5||6%||25%||$716||$179||$12,462||25% (of total return)||$757||$846||$12,537|
Start with $10,000. After year 1, you will have $150 less total return after taxes (compared to the non-taxed amount of $10,600). Going into year 5, you will be starting with a higher amount ($12,625) if the taxes were deferred than not ($11,925). In year 5 (the year where the taxes have been deferred to) you will end up with a higher starting amount, which shows that deferring taxes is the best approach.
Editor's note: Did I do these calculations correctly? --Assumer 08:14, 26 March 2013 (CDT)
How do I put more of a "break" between the taxable and tax deferred columns? Like a double vertical bar? --Assumer 08:14, 26 March 2013 (CDT)
- You can get a lot more complicated as shown here: wikipedia:Help:Table#Setting borders, but one simple approach is to insert a non-break space ( ) see wikipedia:List of XML and HTML character entity references. Tables usually ignore spaces, but non-break spaces force the insertion. Note the column spans the table. --LadyGeek 21:12, 26 March 2013 (CDT)