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Old 06-02-2014, 08:08 AM   #61
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Originally Posted by RetireAge50 View Post
Tax deferred is better if in retirement you are in the same or lower tax bracket.

If you do not think this is true please explain and show math.
I was thinking there was something to the point that paying 15% LTCG tax on the profits is better than 25% on all withdrawals but that never works out if you were in the same tax bracket and made any profit at all. Here's the math that proves your point:

Assume $10,000, with the option to defer or invest in taxable. You can defer all $10,000, but you are hit with a 25% income tax if you don't defer, so you only have $7500 to invest.

Over the years, your investment doubles when you go to withdraw it. Your tax deferred is now with $20,000, and if you have to pay 25% in withdrawal, you'll net $15,000.

You taxable account also doubled, from $7500 to $15,000, but you have to pay 15% on that gain, so it is reduced by $1125 to $13,875.

This is a simplified version showing the worst case for deferring, because tax deferred money is taken off the top where you are in the highest tax bracket, but when you go to withdraw it, many of it is likely in a lower tax bracket until you hit the 25% bracket, so the effective rate is usually less than 25% bracket.

I agree, there's no trap at all as long as you are in the same or lower bracket in retirement. I wish I could delete my above post since it was incorrect, but it appears I can no longer edit or delete it.
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Old 06-02-2014, 09:30 AM   #62
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Originally Posted by CaliforniaMan View Post
One of the big incentives that kept me contributing to my 401k all these years, usually at the max like you, was the tax incentive.

I never felt it was a trap either, just a great opportunity.

This is exactly the way I see it also.

We always socked away as much as possible into our 401ks and (spousal) tIRAs, taking advantage of the tax deferrals to the full extent possible. In our earlier years we assumed we could be in a lower tax bracket when we retired, but as it is turning out, we will likely remain in the same bracket during ER and retirement years. Poor, unfortunate us.

Of course I'd always rather pay less taxes and I do my best to legally minimize them. I just don't see how having enough retirement income to put one in higher tax brackets is a bad thing, or some sort of 'trap'. I prefer to have enough income to live comfortably rather than not have enough income to do so, even if it means I have to pay taxes on that higher income.

We all could have chosen not to use tax deferred retirement plans and paid those income taxes 10, 20, 20, 40 years ago. In which case we would have not had the use of and/or compound earnings on those tax $$ for all those years. I believe I took advantage of Uncle Sam's tax deferral policy as it was intended, to my advantage, and am happy that I did. I hate paying taxes now, but that is the deal I made and understood years ago, and I'm ok with that. (Hopefully tax rates won't start climbing now...).
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Old 06-02-2014, 09:36 AM   #63
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This is exactly the way I see it also.

We always socked away as much as possible into our 401ks and (spousal) tIRAs, taking advantage of the tax deferrals to the full extent possible. In our earlier years we assumed we could be in a lower tax bracket when we retired, but as it is turning out, we will likely remain in the same bracket during ER and retirement years. Poor, unfortunate us.

Of course I'd always rather pay less taxes and I do my best to legally minimize them. I just don't see how having enough retirement income to put one in higher tax brackets is a bad thing, or some sort of 'trap'. I prefer to have enough income to live comfortably rather than not have enough income to do so, even if it means I have to pay taxes on that higher income.

We all could have chosen not to use tax deferred retirement plans and paid those income taxes 10, 20, 20, 40 years ago. In which case we would have not had the use of and/or compound earnings on those tax $$ for all those years. I believe I took advantage of Uncle Sam's tax deferral policy as it was intended, to my advantage, and am happy that I did. I hate paying taxes now, but that is the deal I made and understood years ago, and I'm ok with that. (Hopefully tax rates won't start climbing now...).
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Old 06-02-2014, 09:47 AM   #64
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We all could have chosen not to use tax deferred retirement plans and paid those income taxes 10, 20, 20, 40 years ago. In which case we would have not had the use of and/or compound earnings on those tax $$ for all those years. I believe I took advantage of Uncle Sam's tax deferral policy as it was intended, to my advantage, and am happy that I did.
+1

As I said, some people want a new four lane highway to the seashore, down hill both ways.
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Old 06-02-2014, 10:01 AM   #65
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"As I said, some people want a new four lane highway to the seashore, down hill both ways."

================

LOL, I saw that... great way of putting it!
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Old 06-02-2014, 02:12 PM   #66
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Originally Posted by ajs56 View Post
We always socked away as much as possible into our 401ks and (spousal) tIRAs, taking advantage of the tax deferrals to the full extent possible. In our earlier years we assumed we could be in a lower tax bracket when we retired, but as it is turning out, we will likely remain in the same bracket during ER and retirement years. Poor, unfortunate us.

Of course I'd always rather pay less taxes and I do my best to legally minimize them. I just don't see how having enough retirement income to put one in higher tax brackets is a bad thing, or some sort of 'trap'. I prefer to have enough income to live comfortably rather than not have enough income to do so, even if it means I have to pay taxes on that higher income.
Exactly. I think it's extremely unlikely that we'll pay less tax in retirement than we do now based on our income, and the tax brackets. We're currently nudging the top of 25%, and we get there because of 403(b) deductions and mortgage interest deductions. So, right off the bat, this "trap" is saving me 3% in taxes now. In the next five years, it's likely we'll go up to 28%. After that? We'll come back to 25%, but I don't see much of any way we'll be below that 25% bracket in retirement. I can dream that we'll retire well enough to be in the 28% bracket.

In other words, I'm splitting hairs between 3%, and I've got stuff in Traditional, Roth, and taxable accounts. Lots of flexibility to mess with in the future and attempt to manipulate taxes to the lowest possible level... I'm going to pay, and probably at the same rate (or close to it), it's just a matter of when. If I can grow some deferred money in the meantime, that's to my benefit.

If someone wants to tell me I'll have to pay 39.6% in retirement (assuming current brackets), I'm cool with that trap. :-)
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Old 06-02-2014, 02:27 PM   #67
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Another benefit of a tax-deferred account is that you can use it to rebalance during the accumulation phase without worrying about the tax implications.
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Old 06-02-2014, 04:36 PM   #68
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Another benefit of a tax-deferred account is that you can use it to rebalance during the accumulation phase without worrying about the tax implications.
Yep, this too. All of our rebalancing right now is done inside a 403(b).
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