In a dividend reinvestment model, you would lose 15% of the dividends yearly, instead of just losing 15-25% or whatever your tax rate will be in retirement once.
Suppose I have a $100 stock which pays $4 dividends yearly, and I reinvest the dividends once a year:
1. In a taxable retirement account, in 30 years, it will make $224 in profits, which will be taxed let's say at 20%, and the net profit will be $179.
2. In a taxable account, you will lose 15% of the dividends as tax every year (that's money that would grow for another 1-29 years), ending up with a total of $172 in net profit.
Now if you multiply these numbers by 1,000, the difference is $7,000. If you now work in a state with income tax and, at retirement, you move to one with no income tax, the difference would be catastrophic. If you add an extra loss of just 5% yearly, as state income tax, to the second situation (taxable account), you would end up with a profit of only $157 after 30 years. In the first situation, you would avoid paying a state income tax, just by moving to a "retirement state", so the profits would be unchanged.
3. In the case of a Roth, you start with $100 from your paycheck and pay 28% federal tax now, making it really a $72 investment. After 30 years at 4%, you end up with only $233, including your initial investment, i.e. $133 in net profits. Ouch, and we haven't even counted the state tax!
The greatest friend of the investor is (compounding over) time. The greatest enemy are taxes.
P.S. There might be mistakes in my calculations. Please take them with a big grain of salt.
