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Old 10-27-2009, 08:00 AM   #21
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My gut feeling is ill be in a lower bracket when i retire, as besides the decades of the brackets allowing more and more thru at lower rate and the fact that im moving from new york city to pa and thats a big drop in state taxes, also no more pay check. there is one other thing i feel

i cant see any political party telling 180 million baby boomers that they are raising their income taxes..... i do see taxes of all kinds popping up and increasing but i dont think income tax increases are in the cards for middle america for our generation.


i always like to plan around what was, what is and what stands a good chance of what will be. i never like to plan around what if's
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Old 10-27-2009, 08:17 AM   #22
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MJ107........this is, in fact, a "hair hurting" exercise. I think both of you are right.......in the example you each chose to solve. In your case, you are assuming a limited amount of cash, so that the IRAs end up starting with different amounts. jdw has assumed "unlimited" amounts of cash so that the IRAs end up starting with the SAME (maxed out) amount. In his case, the Roth will win. Note: I probably didn't use the current maxed out amount but that doesn't affect conclusion.

I'm probably saying the same thing as jdw w/ different words:
1) Rothman makes $4K contribution to Roth IRA. He has to pay extra $1K in taxes so his taxable account is $1K smaller than TIRAman.
2) TIRAman makes $4K contribution to TIRA. He pays no taxes on that income. His taxable account is $1K larger than Rothman.
3) Some yrs later, the investments have doubled. Rothman has 8K, all of which is tax free. TIRAman has 8K in TIRA,after tax = 6K. He also has 2K more in aftertax account (before taxes), pays tax on 1K gain=
1.85K after tax. TIRAman has total of 7.85K which is less than the 8K of Rothman. Whether you want to call that "within spitting distance"
or 1.875% less is a semantic issue.

The tricky part is not counting the 1K difference due to the tax twice.

The Roth wins in jdw's case because, when both Roth and TIRA are the same initial size, the Roth is "effectively larger".
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Old 10-27-2009, 08:24 AM   #23
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Exactly my point, if you compare you must offset the difference out of pocket by increasing the non roth.... otherwise its not apples to apples

taking 5,000 in income to put 4000 in a roth and invest another 1,000 in pre-paid taxes is not a good comparison to only an investment of 4000 in a traditional or 401k without accounting for the extra money layed out in the roth case

the fact is if its roth vs traditional the net amount is exactly the same at the end . there will be a slight diference in roth vs taxable investment / tradional ira combo giving the edge to a roth.
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Old 10-27-2009, 08:51 AM   #24
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MJ107........I think I have not succeeded in my attempt. I'm not sure I understand what you are saying but you cannot increase the TIRA (non roth) over the Roth contribution because there is a maximum annual contribution limit (which probably is different from what I used in my example....but doesn't affect conclusion). You can only account for the difference in an after tax account owned by TIRAman.
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Old 10-27-2009, 08:57 AM   #25
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yes i understand that part of it.... but to simplify my point 4,000 in a roth is exactly the same as a 5000 contribution in out of pocket costs to a 401k and assuming same tax bracket, equal returns and costs the returns from both would be identical. the tax free return of the roth is the same as the 401k after taxes.

4000 in a roth plus 1000 in taxes = 5,000 in 401k contribution....

the roth will give you no rmd later on but that may or may not be a factor if your ss will end up being taxed later anyway from other income sources....

the fact we are in new york city , a high tax locality and high tax state plus no pay check when we pull the plug next year on working and move to PA may very well offset the taxes created later on by the rmd by lower taxes in retirement...

my plan is to live off my ira's and 401k money first dwindling down the rmd's long before i get there.

i have lots of numbers to crunch to check all this out.

Its some tough calculations to see whether hitting 401k money first as opposed to having had a roth and letting it alone would be a head or behind from letting the taxable money grow and paying on everything at a lower tax rate later then pre-paying everything with a roth now and most likly a higher tax rate. even if rates stay the same the state and local taxes now are brutal..


grrrrrr my hairs hurting again ha ha ha
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Old 10-27-2009, 09:33 AM   #26
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Quote:
Originally Posted by jdw_fire View Post
o really? how bout this.
You can play games with numbers, but mathjak's basic premise is correct.
For Roth:
(B*Tr)*Int where B is beginning balance, Tr is tax rate (ie 0.75 if in 25%
tax bracket), and Int is the interest rate return.
for IRA:
(B*Int)*Tr ....which is exactly the same as Roth.

The Roth allows you to invest more because you pay the taxes up front
before you deposit the money. Advantage Roth. So if in 20% tax bracket,
your $5k in the Roth costs $6K, so your total investment cost is more than
if you put the money into a regular IRA. So you have to remember this when comparing IRA vs Roth comparison.
Then it becomes a question of tax rates now or later.
TJ
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Old 10-27-2009, 09:38 AM   #27
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MJ107...........the model is only as good as the assumptions
(sometimes it is easy to forget the basic assumptions). jdw's is the "maxed out" model with "unlimited cash" so able to max out Roth (+taxes) and 401K. If not "unlimited", then your model has validity. No right or wrong here, just assumptions.
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Old 10-27-2009, 09:39 AM   #28
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assumptions and sore hair ha ha ha
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Old 10-27-2009, 10:17 AM   #29
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Originally Posted by teejayevans View Post
You can play games with numbers, but mathjak's basic premise is correct.
For Roth:
(B*Tr)*Int where B is beginning balance, Tr is tax rate (ie 0.75 if in 25%
tax bracket), and Int is the interest rate return.
for IRA:
(B*Int)*Tr ....which is exactly the same as Roth.

The Roth allows you to invest more because you pay the taxes up front
before you deposit the money. Advantage Roth. So if in 20% tax bracket,
your $5k in the Roth costs $6K, so your total investment cost is more than
if you put the money into a regular IRA. So you have to remember this when comparing IRA vs Roth comparison.
Then it becomes a question of tax rates now or later.
TJ
a better comparison would be roth to 401k so you dont bump the 4k limit.

then you can do the 4000 into the roth and 1000 into prepayment of taxes vs the 5,000 in the 401k ..

you bump the max trying to compare roth to deductable ira and so part of the deductable ira investment would have to be made in a taxable account outside the ira.... in that case roth would fair slightly better
depending again on whether tax rates are higher or lower later on

so far it looks like ill pass on any conversions.... ill just keep funding the 401k
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Old 10-27-2009, 11:01 AM   #30
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a better comparison would be roth to 401k so you dont bump the 4k limit.

then you can do the 4000 into the roth and 1000 into prepayment of taxes vs the 5,000 in the 401k ..

you bump the max trying to compare roth to deductable ira and so part of the deductable ira investment would have to be made in a taxable account outside the ira.... in that case roth would fair slightly better
depending again on whether tax rates are higher or lower later on

so far it looks like ill pass on any conversions.... ill just keep funding the 401k
math, before i start to address what you are now saying let me ask you a question. are you only investing in tax advantaged ways? if not then my argument holds. in other words if you are doing any saving/investing in after tax accounts my argument holds.

in reviewing what you wrote since my post i see that you are changing alot of conditions of YOUR original example, changing tax rates, in essence changing returns (by changing the investment products), even you making a move. NONE of these things invalidate what i said since i stated the conditions up front.

and now in the post i quoted above you even change the TIRA to a 401k. well this is bogus. the reason to compare the TIRA to a roth is that if you contribute to 1 you are giving up the option of contributing to the other. this is not so when comparing the roth to a 401k and therefore your suggestion is not a "better comparison".

now getting back to that question i asked above, i submit that my handling of the example is more relevant to people saving for ER than your original 1 because people who are saving for ER will be saving more than what they can contribute to their ira (traditional or roth) and therefore they can max out their contribution to said ira, which ever 1 they choose to contribute to. and my example remains relevant when, after you have maxed out your 401k, you are still saving more money or in other words you are doing some non tax advantaged saving/investing.

i am sorry you dont seem to like the result that my example shows but my example is still correct. (it also works for ira conversions, meaning if tax rates and investment returns are the same it pays to convert a TIRA to a roth provided you pay the taxes with non ira money.) i addressed a very simple statement you made with an equally simple example. this is not to say that all of the things you brought up since shouldnt be considered but what you brought up since doesnt disprove my example.
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Old 10-27-2009, 11:30 AM   #31
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i think you figured wrong but im not sure.... first question is why did you not figure it with all 4,000 in the ira and 3,000 in the roth which is 4,000 less the 1,000 tax. which is typically how it works out for a 4,000 layout .?
btw the answer to this question is i have been retired so long that i dont know (and didnt look up) what the max contribution is to an ira. however that said if your tax rates and investment yields are the same it pays more if you max out your roth when compared to maxing out your TIRA.
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Old 10-27-2009, 11:39 AM   #32
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the origional was just a general premise that a roth dosnt yield higher returns from the fact that the returns grow tax free... i was thinking in terms of a 4000.00 ira contibtuion vs a 4000 roth contribution where 3000 goes in the roth and 1000 to prepay taxes. that was my example... that way 4,000 came out in both cases. many folks have a limited amount of money they can contribute to their plan so what comes out of pocket is important.

in order to get 4000 into a roth they need to cough up about 5,000 of income.. to get 4,000 in a traditional ira growing they only need cough up about 3000.00 in income and 1,000 from their refund...

you introduced an example where the ira was maxed out , so in order to invest equal amounts you would have to invest 1000 bucks outside the ira.... in that case the taxes on the money outside the ira would be taxed only on the gains... yes the roth would fair better...

then we compared a roth to a 401k where you wouldnt bump the limit...

4,000 in the roth was the same out of pocket as 5000 in the 401k... again not 1 penny difference in net amounts at the end.

the only thing i saw as a flaw was i believe you took 250 bucks off the 1,0000 you were putting in the taxable investment in your example and i said that would be incorrect, you count all 1,000 as the investment as that was funded with your tax refund money.

we are both talking the same thing but your talking about what happens after you max an ira and i was talking putting in the same amounts out of pocket
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Old 10-27-2009, 12:57 PM   #33
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we are both talking the same thing but your talking about what happens after you max an ira and i was talking putting in the same amounts out of pocket
and which case is probably more relevant to someone trying to save enough to ER? i think that someone would likely be maxing out his/her ira. so i think it is important for that person to know that, in some cases, it does make a difference which type of ira they put their money in, dont you?
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Old 10-27-2009, 01:06 PM   #34
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Absolutely
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Old 10-27-2009, 01:06 PM   #35
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My gut feeling is ill be in a lower bracket when i retire, as besides the decades of the brackets allowing more and more thru at lower rate and the fact that im moving from new york city to pa
Just an FYI, based upon my actual circumstances (resident of PA, retired in 2007).

Total taxes (e.g. federal, along with a slight reduction in state/local) did not get reduced on an overall basis (based upon my circumstances).

I planned on 100% on net income in retirement vs. my income when I was working (including taxes). That assumption has proved correct (in my circumstance - yours, of course may be different)....
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Old 10-27-2009, 01:34 PM   #36
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just not having the nyc tax alone is a big savings for us....
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Old 10-28-2009, 03:38 PM   #37
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I read something in a magazine that made me think....it suggested that you may only want to contribute enough to the 401k to get your company match, and save the rest in a taxable account. The logic behind this was that tax rates are low now compared to what they will be.
I think whether you start raising cash and stop or limit your contributions to your tax deferred savings in the last few years before retirement really depends on how you have your nest egg allocated. DW and I sat down and decided we were close enough to jump in a year or two but we would prefer to have more $ outside of retirement before retiring so we wouldn't have to touch the retirement funds until after 59.5. So we decided to cut back on the defined contributions to raise cash or short term investments outside of retirement. That's what we are doing anyway.
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Old 10-28-2009, 05:20 PM   #38
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a giant factor is whether you have enough money to leave just sitting in a roth for the kids .. its an incredible passer of wealth..

as long as the kids take their first witdrawl in the same year the owner dies they can get a lifetime of tax free withdrawls... imagine decades of growth compounding tax free . if they blow it and miss the first year then they have to disolve the roth within 5 years... that kills the entire purpose in my eyes. sooooo make sure your heirs know this ....

in fact if its still allowed and im not sure if they closed this whole but leave it to your grandchildren... can you imagine 100 years of compounded tax free growth.

to me thats the best part... whether ill be in a higher bracket, a lower bracket , thats small potatos compared to the wealth passing ability.
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Old 10-28-2009, 05:58 PM   #39
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My take is the numbers work out the same for roth and trad, so when all is said and done you end up with the same amount of distributions. But the roth has fewer limitations so it's more flexible. Many people don't know that you can withdraw the principal (not interest) at any time from the Roth with no penalties at all. Not something I would want to do, but if my back was up against a wall it's a nice option to have.

And comparing the Roth versus non-retirement accounts, consider that retirement accounts are protected income; i.e. if god forbid someone successfully sues you for your life savings you might be able to hold onto the retirement money. Again, not something I would plan on, but a good reason to prefer having the money in the Roth where I can get at it any time but few others can.
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Old 10-28-2009, 06:06 PM   #40
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yes and no , we discussed this above... the roth lets you put the full limit inside the roth to compound tax free. its actually allowing you to put more in because the money your prepaying the taxes with is also part of the mix. 5000 in a roth plus 1000 to go for taxes is actually like 6,000 in a traditional but since you cant put 6,000 in a traditional you have to put the extra in a taxable account where the gains will be taxed,.... if your not maxing out your contributions and can add more to the traditional then the gains will be the same. but if your maxing them out the roth wins most of the time.

to me the above is the small potatoes part to it... personaly i think ill be in a lower bracket when i retire in 1-1/2 years. the real meat is the wealth passing ability . the ability to compound and grow tax free for my entire lifetime. . it can pass enourmous amounts of wealth to your kids and give them a lifetime of tax free, still compounding tax free, income

on the tradional the compounding on the full amount stops at 70-1/2 and you have to start killing your goose thats laying the golden egg by breaking it up. each year less and less is compounding .... the roth goes on compounding tax free forever and that is where it really shines and comes thru.
its like the traditional bumps the house limit and if you were playing double or nothing at the casino eventually if you loose the house limit keeps you from making it back. thats 70-1/2, the house limit for the traditional.

you can leave some serious dough to your kids or better yet , if its still allowed your grandchildren.... when your roth is spread out over their lifetime too now thats like 100 years of compounding tax free. its amazing amounts of money...

for me its not about the slight difference in gains if im going to hit the money anyway to live on. for me its for money i know ill never get down to spending and just let that grow tax free for 100 years
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