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Re: ORP is back!
Old 06-27-2003, 02:52 AM   #21
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Re: ORP is back!

Hi Dory! And just imagine how much time I'd have
if I did not have to focus on tax implications. I agree
with your prediction. With most politicians, the minute
they get elected they start figuring how to get reelected.
This leads to all kinds of mischief. On the other hand,
they would be causing trouble anyway. I would like
to send most of them home and tell them to do nothing at all. We will just mail their checks. That way we would all be better off.
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Re: ORP is back!
Old 08-02-2003, 04:16 PM   #22
 
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Re: ORP is back!

Quote:
(401 => IRA => Roth) Once in the Roth, future earnings become tax free. In addition, Roth's don't require minimum distributions when you're over 72 providing additional flexibility.
Don't quite follow you on this one. Could you elaborate? I thought when you converted from IRA to Roth you have to pay taxes on everything you take out? So are you saying just converting enough to not push you over the bracket? - You still have to pay some taxes and are losing some earning power when you do. Also in a Roth as I understand all withdrawels are tax free not just future earnings - correct?
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Re: ORP is back!
Old 08-02-2003, 05:01 PM   #23
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Re: ORP is back!

This is for Ted in re. his comments on taxes
and tax avoidance. I use every tax avoidance device
which can be conjured up. Always have. My opinion
is that the government will likely waste whatever
they manage to get their hands on, or even worse,
they will use it to promote some half-baked scheme
to damage the economy and subvert society in general.
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Re: ORP is back!
Old 08-04-2003, 07:36 AM   #24
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Re: ORP is back!

Quote:
This is for Ted in re. his comments on taxes
and tax avoidance. *I use every tax avoidance device
which can be conjured up. *Always have. *My opinion
is that the government will likely waste whatever
they manage to get their hands on, or even worse,
they will use it to promote some half-baked scheme
to damage the economy and subvert society in general.
I think that most people who read this forum recognize that government provides some benefits to them and is worth keeping.

Milton Friedman has pointed out the economic truism that the real cost of government to the American people is what government spends. The correct implication is that if the American people don't pay this cost through taxes, they will pay it through another mechanism (i.e., devaluation of their financial assets).

JohnGalt and Dr. Friedman would use this as an argument for reducing government as much as possible. I regard it as an argument for making government as efficient as possible, and (in effect) distributing the "savings" among people of all income levels. And part of this process is to reduce the "overhead" cost associated with the incredible complexity of the tax system.

This overhead cost is as high as it is because virtually everyone, like JohnGalt, has to "jump through hoops" to minimize their tax bill. This is particularly true of corporations, which (of necessity) simply pass the cost of the tax itself, and the cost of the efforts to calculate it and minimize it, on to consumers. This is sheer economic lunacy, driven by the liberal notion of "taxing giant corporations" rather than "people."

I would replace the corporate profits tax with a national sales tax. I think that a move like that could eventually be politically possible if it is "revenue neutral."
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Re: ORP is back!
Old 08-04-2003, 08:14 PM   #25
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Re: ORP is back!

Cutthroat says
Quote:
You still have to pay some taxes and are losing some earning power when you do
Yes, but others have asserted that it is the tax rate you pay, and the difference between paying 15% now, vs. 15% later is zero. I.e., if my money is to double in 10 years and I have 1000 now in an IRA, I can convert it to a Roth IRA and have $850 in the roth (assuming the 15% tax rate under discussion). Then the Roth doubles and I have $1700. Or the IRA doubles to $2000, and I take it out, pay 15%, and net.... $1700. There was a web site with a name like gummy that had equations that proved this instead of examples, but I seem to have lost track of them.

ORP also confirms this. If you run it and review the output, it appears to attempt to keep you in a tax bracket as long as possible by maxing out the tax bracket. In my case, it mixes after tax funds, Roth funds, and traditional IRA funds to keep me at the top of my tax bracket and not into the next tax bracket for the next 30 years.

I think it comes down to a bet on what tax rates will do. These models simply assume no change, other than possible inflation of brackets, and there is not really any better guess.


Wayne
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Re: ORP is back!
Old 08-05-2003, 05:04 AM   #26
 
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Re: ORP is back!

Quote:
Yes, but others have asserted that it is the tax rate you pay, and the difference between paying 15% now, vs. 15% later is zero.
Not True at all. - The difference is the interest you would be losing by paying the 15% now.
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Re: ORP is back!
Old 08-05-2003, 06:44 AM   #27
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Re: ORP is back!

Here's the math, taking an example of $1000 in pre-tax earnings that is invested for 20 years at a pre-tax rate of 10%. *Say that the tax rate is 15%.

A. *The "Roth IRA" case. *The money is initially taxed at 15%, leaving $850 to invest. *Its future value "F" in 20 years (not subject to additional tax) will be

F = $850 (1 + 0.10) exp 20 = $5,718.38

B. *The "401(k)" case. *The money is not taxed initially, grows tax-free, and then is taxed at 15% at the end of 20 years.

Before taxes, F = $1,000 (1 + 0.10) exp 20 = $6,727.50

After taxes, F = $6,727.50 (1 - .15) = $5,718.38

These two results are exactly the same *(because of the principle that a x b x c equals b x a x c).

C. *The "Non-Qualified Account" case. *The money is taxed initially, and then the earnings on it are taxed every year. *The effect of the yearly tax on earnings is to reduce the growth rate from 10% per year to 8.5% per year, and look what this does: *

The initial after-tax amount is $850 and this grows at 8.5% per year, after-taxes, so the future amount (on which no further taxes are owed) is

F = $850 (1 + .085) exp 20 = $4,345.24

Note that a relatively modest 15% tax on the earnings has reduced the future value by $1,373.14 *(24%)relative to its value in the qualified accounts, and by $2,382.26 (35%) relative to its value if it were not taxed at all. *

What is happening is that the annual tax on earnings is substantially reducing the benefits of compounding. *Fees paid to financial managers have the same effect. *Vanguard is absolutely right when they point out the benefits of keeping these costs to a minimum -- it's not just another marketing gimmick!


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Re: ORP is back!
Old 08-05-2003, 10:32 AM   #28
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Re: ORP is back!

Quote:
NOW paying taxes outside the Roth gives another $1500 to earn tax-free. I would rather have the $1500 in my Roth, than in a fully taxable account.
My brain is not in math mode today, but keep in mind when you add in external money to pay taxes you're unbalancing the comparison.

Example:

$10,000 IRA + $1500 = $10,000 Roth IRA, example future value of $20,000 untaxable in 10 years

$10,000 IRA + $1500 might equal $11,500 trad. IRA, example future value of $23,000 pre-tax in 10 years, $19,550 after 15% tax

If I did that right then the Roth still comes out ahead, but there are other possibilities for that $1500 you had available in the example to pay the tax on the conversion.
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Re: ORP is back!
Old 09-30-2003, 02:19 PM   #29
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Re: ORP is back!

may I join you?all of you made some valid point,but estate taxes or estae building?roth ira are the way.
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Re: ORP is back!
Old 10-02-2003, 10:17 AM   #30
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Re: ORP is back!

Three card monte- fixed pension, taxable dividends(some growth) and now at age 60 - IRA. Plus when do I throw in SS - 62,66, or 70? Single 15% bracket - expect to jump one bracket at least if I let IRA ride to 701/2 at 7% or more.

Case 1. Roth 10k per year to age 70 and pay taxes from dividend steam - and spend down taxable pot as necessary. Take SS at 70.

Case 2. Spend each income stream as it comes to bear - fixed pension, dividend income, SS t 62, IRA as needed.

? ORP, FIREcalc, or Quicken or plain old pencil and paper and add up the individual calc.'s.

Just now starting to ponder the model. Any Suggestions?
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Re: ORP is back!
Old 10-02-2003, 10:44 AM   #31
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Re: ORP is back!

Uncle Mick,

I'd recommend MS excell or another spreadsheet program if you have it. It can handle all of the calculations you need and you can change the variables to quickly see how it effects the outcome. No pencil or paper needed.

Did you run the SS calculator to see what you get at 62, 65, and 70? You can easily do the math to see how long it takes to make up for the lost benefit if you take it at 62. It's kind of morbid, but see how long you have to live to make out by holding off on the benefit until 65 or 70...

I would think you would want to base your IRA withdrawl on your health considerations. Do you expect to be healthy enough at 70 to use the extra income? Or do you expect to need the IRA to fund some health care if needed? You say you are single, do you need to save the money for some other reason than your pleasure? If not, enjoy it now.

Kind Regards,

Chris
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Re: ORP is back!
Old 10-02-2003, 12:03 PM   #32
 
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Re: ORP is back!

I have run similar SS calculations. I assumed a return of 6%. Taking my full SS at 66 instead of 62 - I come out ahead at age 92! - I'm not betting on this one at all. I'm taking it at 62. I know of no one that delays their SS until 65 or 66 unless they are still working - And then tax reasons make sense to delay it!
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Re: ORP is back!
Old 10-03-2003, 05:49 AM   #33
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Re: ORP is back!

I have webtv but have access to a spreadsheet program on a friends computer. My file of yearly SS statements has numbers to use. Preliminary hand held calculator numbers show age 62 the best option also - breakeven way past 84.3 - my old IRS drop dead date.

I'm leaning towards mix and match my cases 1&2 by Rothing in years when we can't find things to spend on and spending 'while we're young' when opportunity strikes.

Rohing some chunks for 24 years hence - just in case the IRS is wrong about 84.3 - ho ho ho!
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Re: ORP is back!
Old 10-03-2003, 11:54 AM   #34
 
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Re: ORP is back!

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84.3 - my old IRS drop dead date
Don't quite follow you here - Unclemick - What is the IRS drop dead date?
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Re: ORP is back!
Old 10-03-2003, 03:20 PM   #35
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Re: ORP is back!

I don't know the exact title but my life expectancy back in the 1990's according to the IRS was 84.3 years ?pub. 550 I think when I was reasearching before 591/2 withdrawals, minimum withdrawals at 701/2 and IRA's in general. The 84 was OK, but the 0.3 tickled my funny bone.
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