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GM Thread got me thinking.........
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<blockquote data-quote="HerefordSire" data-source="post: 666402" data-attributes="member: 4437"><p><em>Here is where a person gets burnt....</em></p><p><em></em></p><p><em>Say you have a Jumbo Certificate of Deposit (CD) in a tax deferred account for $100K signed with an interest rate of 4% guaranteed by the full faith and credit of the USA (FDIC insurance). The first year, interest income is $4K. The second year, interest income is $4,160 if the interest income is reinvested at the same rate. By the 20th year, the returns explode upward because of the magic of compounding interest as long as the interest income is reinvested in each of the 20 previous years. Theoretically, let's say your cost basis is $100K.</em></p><p><em></em></p><p><em>Lets also say in this example after the 20th year $1M is now in your account. Therefore, you have a tax liability of the current tax rate on $900K usually classified as ordinary income tax and not capital gains tax at a lower rate. If you keep the funds in the account when you die, estate taxes can kick in amounting to about 50%. So say you die, estate tax liability at 50% is $500K and income tax liability is 40% or an additional $360K for a total of $860K. That leaves your family with $140K free and clear. </em></p><p><em></em></p><p><em>I can almost guarantee you the original $100K investment could have bought more 20 years ago than the $140K today mainly because of currency debasement because more dollars are chasing a fixed amount of goods. If you originally bought a limited resource that does not depreciate, such as land for example, I can almost guarantee you the value of the land when sold and all taxes are paid, the buying power received is likely to be greater than the buying power of $140K received with CDs.</em></p></blockquote><p></p>
[QUOTE="HerefordSire, post: 666402, member: 4437"] [i]Here is where a person gets burnt.... Say you have a Jumbo Certificate of Deposit (CD) in a tax deferred account for $100K signed with an interest rate of 4% guaranteed by the full faith and credit of the USA (FDIC insurance). The first year, interest income is $4K. The second year, interest income is $4,160 if the interest income is reinvested at the same rate. By the 20th year, the returns explode upward because of the magic of compounding interest as long as the interest income is reinvested in each of the 20 previous years. Theoretically, let's say your cost basis is $100K. Lets also say in this example after the 20th year $1M is now in your account. Therefore, you have a tax liability of the current tax rate on $900K usually classified as ordinary income tax and not capital gains tax at a lower rate. If you keep the funds in the account when you die, estate taxes can kick in amounting to about 50%. So say you die, estate tax liability at 50% is $500K and income tax liability is 40% or an additional $360K for a total of $860K. That leaves your family with $140K free and clear. I can almost guarantee you the original $100K investment could have bought more 20 years ago than the $140K today mainly because of currency debasement because more dollars are chasing a fixed amount of goods. If you originally bought a limited resource that does not depreciate, such as land for example, I can almost guarantee you the value of the land when sold and all taxes are paid, the buying power received is likely to be greater than the buying power of $140K received with CDs.[/i] [/QUOTE]
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GM Thread got me thinking.........
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