Qualified dividend and long term capital gains distributions

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Reference no: EM131182517

You are planning to save $5k/year, at the end of each year, and invest into a diversified stock index fund. The fund is anticipated to yield an 9.4% total annual return, of which about 3% will be in the form of qualified dividend and long term capital gains distributions, and the rest in non-distributed capital gains.

You can invest the $5k via a Roth IRA account, or a regular taxable account. Your capital gains tax rate is anticipated to be 15%.

How much more money wlll you have at the end of 40 years, if you invest in a Roth account, rather than in a taxable investment account?

Assume that at the end of 40 years you will liquidate your taxable account, and pay taxes on any accrued capital gains at 15% rate (just so we are comparing apples to apples, that is money that you don't owe any tax on). Further, assume that your cost basis in the taxable account is 700K. This includes the annual $5K that you invested that has already been taxed, as well as the annual 3% cash returns that you already paid tax on. So you pay the final liquidation tax only on the difference between cash invested and value of account.

Reference no: EM131182517

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