[theTourne]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Can someone tell me what, if anything, I'm missing about the "magic of compound interest?"

[/ QUOTE ]
You're not accounting for paying taxes each year on the portion of your 8% which is subject to taxation (i.e., capital gains, dividends).

So, if that resulted in an average after-tax return of 7% per year in your taxable account, it would grow to ~$290 in the 20 years.

[/ QUOTE ]

Thanks for the response. I should have been more clear. I was intending to compare a Roth IRA with a traditional IRA, so capital gains/dividends wouldn't be an issue.

[/ QUOTE ]

There are pretty big differences between a Roth IRA and and Traditional IRA.

The main difference is that while both are funded with taxed dollars, with a Roth, your captial gains when you withdraw will not be taxed. It is essentially the exact opposite of a 401K plan. Essentially the Roth allows you to make gains that will never be taxed...

[/ QUOTE ]

I understand the tax timing differences, and I assume you meant this, but appreciation in a traditional IRA is taxed as income, not as capital gains.

My point was that (unless I'm missing something) the value of Roth IRA and traditional IRA accounts will be the same at withdrawl (assuming no change in tax bracket). Several people have told me that Roth IRAs are better because the interest/dividends are not taxed (implying that contributing to a Roth IRA will result in more money at retirement), and I don't believe that to be true.

This obviously ignores other differences such as the option to withdraw contributions early, forced withdrawls at a certain age, changes in tax brackets (which most likely favor a traditional IRA), etc.