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> You wouldn't withdraw $500 per year, You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless
by mlyle 3y ago
> You wouldn't withdraw $500 per year,
You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless your tax rate is low.
Even with compounded interest not subject to taxation until withdrawal, it's not much better. Even in a ridiculous case with 30 years, 10000 * (1.05^30) = $43220 ; minus .4 * 33220 = $29932; 29932 / (1.032^30) = $11401-- or about .4% real return per year.
Opportunity costs beyond inflation make the picture even more ridiculous.
- NavinF 3y agoInteresting, I used different numbers (10 years and 33% tax) in my comment but got the same result of 0.4% real returns. Check my math
- mlyle 3y ago(10000 * (1.05^10) - 10000) * .67 = 4213. 14213/(1.032^10) = 10372; or about a .36% return. Not surprising that a lower tax rate gets to the same number sooner through compounding. BUt the bigger issue is that you have to pay tax on interest as it is accrued, not all at the end. So in your case there's a 3.35% return vs. 3.2% inflation or a .15% net return.
- NavinF 3y agoThanks, makes sense