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great_and_mighty_ada... | Which is a better investment - 7% tax-deferred or 9% taxable? |
Assume:
- I have a marginal tax bracket of 30%
- I am investing for a 15-year time horizon.
- Tax is paid yearly on taxable interest.
- Tax is paid at end-of-term on tax-deferred interest.
- The principal is not tax deductible.
If you can provide a calculator for this kind of stuff, that would be appreciated as well.
I am comparing corporate bonds in a Roth IRA vs. Prosper.com in a taxable account.
Additional Details
To clarify.
The Roth IRA is 7%.
The fully taxable account is 9%. |
 |
 
Feeling Mutual
|
The Roth IRA at 9% taxable is better, because this is a Roth IRA, which is tax free gains. So you don't pay any taxes on the gains, even though it is taxable.
Fidelity.com has calculators, that show taxable and non-taxable figures. |
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stephenweinstein
 |
1. Ronald EB is wrong; A Roth is only tax free if you leave the earnings in it until age 59 1/2 or in certain other cases. If you take the earnings sooner, there are taxes and penalties.
2. If the taxable account earns 9% and you pay 30% in taxes, then, for each $ in the taxable account at the start of the year, you earn 9 cents and pay 2.7 cents in taxes, leaving you with $1.063 at the end of the year. If the Roth earns 7%, then for each $ in the account at the start of the year, you have $1.07 at the end of the year, which is $0.007 more. This may not seem like much, but remember that this happens every year and it adds up. However, if you do not leave the earnings in the account until when they can be distributed tax-free, then the taxes and penalties may exceed the cumulative advantages of $0.007 per year.
Why not Prosper.com in a Roth IRA at 9%? |
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PepsiLime
 |
9% taxable at 30% tax rate results in 6.3% after tax return. Roth IRA is the better bet, and it's also not-taxable as well, so that's even a better bet too boot. |
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DrIG
 |
I vote for the Roth.
Your money is growing tax deferred for 15 years. Reinvest the bond dividends. You will be better off.
Warning some bonds are not good investments. The bonds may be worth less when you take them out. The company may fail and you might not get your money back. |
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ninasgramma
|
The Roth wins, since your after-tax yield on the bonds is 6.3% after federal taxes, versus 7% inside the Roth. You don't need any calculator to see this.
Also, as long as you hold the Roth for five years and do not withdraw money before 59.5 (or meet one of the exceptions), then you pay no tax on the Roth distributions. The Roth is not tax-deferred. Contributions are with after-tax money but all earnings are tax-free for qualifying distributions. |
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skipper
|
A Roth IRA is not tax deferred...the gains are NEVER taxed and the principal has already been taxed. A regular IRA is tax deferred; the tax on both the principal and the gains is deferred until they are withdrawn. |
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bostonianinmo
 |
The 9% taxable investment is 6.3% net of tax. Therefore the 7% non-taxable is the better return.
A Roth isn't tax-deferred, by the way. Accumulation is TAX FREE with a Roth. |
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Judy1
 |
If it's just tax-deferred and you expect to still be in the 30% bracket when the tax is due, then you'll have to pay taxes on it at the end, so won't save a whole lot - so the 9% would be better. If the 7% is tax-EXEMPT, which appreciation in a Roth IRA would be, then it would be better than the 9% in your tax bracket. |
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