A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

EXERCISE 4: LEARN HOW TO
DODGE THE TAX COLLECTOR
One of the jokes making the rounds of the Internet goes as
follows:

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A couple, both age seventy-eight, went to a sex
therapist’s office. The doctor asked, “What can I do for
you?” The man said, “Will you watch us have sexual
intercourse?” The doctor looked puzzled, but agreed.
When the couple finished, the doctor said, “There’s
nothing wrong with the way you have intercourse,” and
charged them $50. The couple asked for another
appointment and returned once a week for several
weeks. They would have intercourse, pay the doctor,
then leave. Finally, the doctor asked, “Just exactly what
are you trying to find out?” The old man said, “We’re
not trying to find out anything. She’s married and we
can’t go to her house. I’m married and we can’t go to my
house. The Holiday Inn charges $93 and the Hilton Inn
charges $108. We do it here for $50, and I get $43 back
from Medicare.”
By telling this story, I do not mean to suggest that you
attempt to cheat the government. But I do mean to suggest
that you take advantage of every opportunity to make your
savings tax-deductible and to let your savings and
investments grow tax-free. For most people, there is no

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reason to pay any taxes on the earnings from the investments
that you make to provide for your retirement. Almost all
investors, except those who are super wealthy to begin with,
can build up a substantial net worth in ways that ensure that
nothing will be siphoned off by Uncle Sam. This exercise
shows how you can legally stiff the tax collector.
Individual Retirement Accounts
Let’s start with the simplest form of retirement plan, a
straightforward Individual Retirement Account (IRA). In
2010 you could take $5,000 per year and invest it in some
investment vehicle such as a mutual fund and, for people with
moderate incomes, deduct the entire $5,000 from taxes.
(Individuals who earn relatively high incomes cannot take an
initial tax deduction, but they still get all the other tax
advantages described below.) If you are in the 28 percent tax
bracket, the contribution really costs you only $3,600 since
the tax deduction saves you $1,400 in tax. You can think of it
as having the government subsidize your savings account.
Now suppose your investment earns 8 percent per year, and
you continue to put $5,000 per year into the account for
forty-five years. No taxes whatsoever are paid on the

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earnings from funds deposited in an IRA. The investor who
saves through an IRA has a final value of more than two
million dollars, whereas the same contributions without the
benefit of an IRA (where all the earnings are taxed at 28
percent each year) total only just over one million. Even after
paying taxes at 28 percent on what you withdraw from the
IRA (and in retirement you might even be in a lower tax
bracket), you end up with over $1.5 million. The chart below
shows the dramatic advantage of investing through a tax-
advantaged plan.