Did I say mandatory? I meant optional! You’re “free” to die in a cardboard box under a freeway as a market capitalist scarecrow warning to the other ants so they keep showing up to make us more!
Did I say mandatory? I meant optional! You’re “free” to die in a cardboard box under a freeway as a market capitalist scarecrow warning to the other ants so they keep showing up to make us more!
I think dividends in a tax-exempt accounts, like a traditional IRA, are only not taxed if you reinvest the dividend or just leave it in your brokerage account. If you move money from your IRA account to, say, your checking account, that’s when you pay taxes (and there are generally fees for moving money out of tax exempt accounts without meeting certain conditions, like being of retirement age).
Right. Although, with a ROTH IRA, you pay taxes before you put the money in. Then you earn tax free even after you take it out. That makes it the preferable vehicle for long-term savings (you should expect your initial investment to double every 10 years, assuming a 7% ROI which is fairly modest - so over 30-40 years you’re saving 8x on the eventual withdrawal).
But this isn’t just limited to IRAs. Using investment funds, you can pull the same trick. Buy the fund, then allow the broker to shuffle the investments within the fund as they please. You only “earn” the money when you exit the fund, in the same way you only “earn” your retirement when you withdraw from your IRA.
Savings accounts and trusts can then be structured to be inheritable tax-free, with your heirs having access to withdraw from the fund without ever actually owning the money (and thus needing to pay taxes on the inheritance). And to make it even more squirrelly, you can borrow against these funds, which allows you to make large purchases without ever actually spending any money. This maneuver, plus a cagey use of declared loses, means you can avoid paying any tax on any investment income virtually indefinitely.
Thanks for expanding on the finer points! With inheritance, they also reset the cost-basis when the owner dies, which means that all the capital gains accumulated over the time that the deceased had ownership is never taxed. Like, if I bought stock for $10, die when it’s worth $100, my sister inherits it, and then sells it for $110 a while later, she only pays capital gains on $10 – not $100.
I don’t think people fully realize how dramatically our tax code rewards capital, at the expense of labor, not just in the broad-strokes (like the tax rate for capital gains vs the rates for income tax brakets) but also in these little details that are easy to overlook. So thanks for the discussion!
There is a big maybe on whether Roth is better than traditional IRA/401k.
My kids are at the age where they are making those bets now. So I made a hugely complicated forecasting tool to forecast which would be better.
I think it really comes down to your view on future tax rates.
Your mileage may vary.
Unless you’re banking on a 0% tax, the ROTH is hard to beat. Compound that by the Traditional IRA being taxed at the normal rate rather than the capital gains rate, and there’s very little reason to use it unless you’re really bullish on tax cuts in the long term.