Balancing withdrawal sources

[ejman]

I am not sure why one would do that.

If a VAT is added on top of the current income tax, what difference would it make? It's simply another tax. The tax defered account maintains its advantages and disadvantages. And, I don't see a difference for not tax advantaged money.

If a VAT is added and the income tax is reduced by the same dollar amount then things get interesting. The tax deffered account starts to look good since, upon withdrawal, one would pay a lower tax rate. Roths may look worse since the taxes on the initial contributions were paid at the earlier, higher rate - but one still has the tax free earnings to offset that. Withdrawals from non-taxed advantaged money would remain the same - no tax since it has already been paid.

If I am wrong or have left something out, please let me know.

Additions to taxable accounts instead of a 401K would make sense if the current tax structure of significantly lower tax rates for Capital Gains and Dividends is maintained indefinitely.

As to VAT, i suspect that I would be much easier to sell politically if it is presented as a replacement for our current income tax. The government would have several incentives for going this way

1) Easier to collect and enforce
2) 401 k, IRA, Roth don't matter anymore Gov still collects tax revenue
3) Probably can be sold to the public as a "fair" tax everybody pays
4) Most people won't have to worry about tax preparation headaches
5) Economic distortions and complexity from current tax system and tax credits and tax exempt entities will diminish.

 

[Koolau]

I am not sure why one would do that.

If a VAT is added on top of the current income tax, what difference would it make? It's simply another tax. The tax defered account maintains its advantages and disadvantages. And, I don't see a difference for not tax advantaged money.

If a VAT is added and the income tax is reduced by the same dollar amount then things get interesting. The tax deffered account starts to look good since, upon withdrawal, one would pay a lower tax rate. Roths may look worse since the taxes on the initial contributions were paid at the earlier, higher rate - but one still has the tax free earnings to offset that. Withdrawals from non-taxed advantaged money would remain the same - no tax since it has already been paid.

If I am wrong or have left something out, please let me know.

In my case, it wasn't the VAT potential that I referred to. VAT isn't even a reality yet. I was simply pointing out that I had not left myself with as flexible a set of income sources as I believe I should have. I simply ended up with way too much tax-deferred money and too little taxable money. SO, now, whenever I need an infusion of cash, I MUST take it from deferred money and pay the tax (up to 25%). IOW, I gave up flexibility to save taxes all those years ago. Now that I am older (wiser) I can see the advantages of having more already-taxed money to blend with deferred money. I can see how anyone else might disagree with this. It shows the issues of the capricious nature of the tax code AND the capricious nature of those who tax us. Not whining (well, maybe just a little) just recognizing reality for my own situation. Yours may be different because YMMV.

 

[marko]

I was simply pointing out that I had not left myself with as flexible a set of income sources as I believe I should have. I simply ended up with way too much tax-deferred money and too little taxable money. SO, now, whenever I need an infusion of cash, I MUST take it from deferred money and pay the tax (up to 25%). IOW, I gave up flexibility to save taxes all those years ago. Now that I am older (wiser) I can see the advantages of having more already-taxed money to blend with deferred money. .

I'm in a similar boat; waaay too much in the IRA and only a little (15%) in the taxable.

IF (big if) a VAT did come our way and they reduced the regular income tax, we could come out ahead...but...y'know what?? They'd say, that it wasn't 'fair' and any IRA w/drawals would be taxed at the old amount.

Seriously, if I had to do it all over again, I'd find a way to hide ALL the cash and get on the gov't dole.

Here in Mass, your EBT delivers an amazingly disturbing array of stuff...and, as one of our pols commented yesterday "Hey, it's the EBT recipients money...they can use it as they wish!"

Jus' sayin'

 

[harley]

I can't imagine that the politicians would be able to implement a VAT and reduce income taxes after a large contingent of intelligent, informed, and financially savvy, voting citizens had paid taxes to convert from pre-tax to Roths over a number of years (decade or more), without having to have a deduction on the income tax forms to counter the monies drawn from a Roth. Talk about political suicide! If a VAT does get implemented I suspect it will have to be done in our (US) standard way of tying on so many exceptions, exemptions, and loopholes that it doesn't significantly change the game plan. And truly (and this comes from a dyed in the wool anti-tax libertarian) if they were to completely dump the old tax system and implement a new and fairer one I don't think I'd mind if I got hit a little harder in the process. Just being proven wrong about the government's ability to do something right would be worth the extra money. I'd probably keel over from the surprise and my SWR wouldn't matter anymore.

 

[ejman]

I can't imagine that the politicians would be able to implement a VAT and reduce income taxes after a large contingent of intelligent, informed, and financially savvy, voting citizens had paid taxes to convert from pre-tax to Roths over a number of years (decade or more), without having to have a deduction on the income tax forms to counter the monies drawn from a Roth. Talk about political suicide! If a VAT does get implemented I suspect it will have to be done in our (US) standard way of tying on so many exceptions, exemptions, and loopholes that it doesn't significantly change the game plan. And truly (and this comes from a dyed in the wool anti-tax libertarian) if they were to completely dump the old tax system and implement a new and fairer one I don't think I'd mind if I got hit a little harder in the process. Just being proven wrong about the government's ability to do something right would be worth the extra money. I'd probably keel over from the surprise and my SWR wouldn't matter anymore.

I'm having a hard time finding reliable statistics (surprise!) but the best I can find i s that 14.5% of the tax paying population contributed to an IRA (Roth and Regular IRA) in 2006. I don't know what percentage is Roth vs Regular IRA but I suspect it can't be better than 50% for ROTH (Wild ass guess on my part) if so, 7% or so of the contributors are Roth aficionados. If 7.5% of the IRA contributing population is in fact willing to vote based on a single issue and Roths are the deciding factor it doesn't sound like political suicide to me but I'm willing to be edumacated. As to your statement that "Just being proven wrong about the government's ability to do something right would be worth the extra money. I'd probably keel over from the surprise" I tend to agree.

 

[harley]

I'm having a hard time finding reliable statistics (surprise!) but the best I can find i s that 14.5% of the tax paying population contributed to an IRA (Roth and Regular IRA) in 2006. I don't know what percentage is Roth vs Regular IRA but I suspect it can't be better than 50% for ROTH (Wild ass guess on my part) if so, 7% or so of the contributors are Roth aficionados. If 7.5% of the IRA contributing population is in fact willing to vote based on a single issue and Roths are the deciding factor it doesn't sound like political suicide to me but I'm willing to be edumacated. As to your statement that "Just being proven wrong about the government's ability to do something right would be worth the extra money. I'd probably keel over from the surprise" I tend to agree.

Don't forget, only about 20% of the population actually votes. I think that 7.5% (or whatever) number are a group that are likely to be voters, especially if their pockets are being picked. It makes for a pretty significant chunk of the voting population. The people that make the noise seldom actually show up at the booths. I'll be curious to see how it plays out over time.

 

[mickeyd]

mickeyd, I will explore the strategy of taking spousal benefits next year at 66 since DW started at 62 on her earnings record. It still sounds too good to be true, but I'll check on it.

When we first signed DW up for SS benefits, the "guy" estimated that her "half" of my 70 benefit might be virtually the same as her "continuing" 62 benefit at that time. IOW, her half of my 70 benefit would be significantly reduced (32%??) because she began at 62 and it could end up being within a few dollars. Not that I won't check it at that time. You probably already knew this, but just in case...

I don't know much about anything, but what I do know is that this strategy happens to work to a "T" for several reasons for us~ I am FRA; DW is exactly 4 years younger and has earned much less than I have; we do not need current SS to live on (but are happy to receive the current reduced amounts anyway); we are in good health and BOTH have a family health history that indicates that we may be part of the superannuated at some time in the future.

It's all a matter of doing the math and deciding if you are favored.