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Old 08-01-2011, 03:44 PM   #61
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Originally Posted by DoraM View Post
Unless you want to go heavy on the risk side of things by keeping a large amount of stocks in your taxable account, you need a decent amount of tax deferred space to hold bonds. I would like to hold 80% TIPS but just do not have the room in 401K or IRA for that. When TIPS are adjusted for inflation, the adjustment is taxed as income each year. Very hard to grow retirement savings like this.
Your case proves the point (and the problem) with these tax preferenced accounts. You, in effect, get a subsidy from the government and it allows you to invest in ways that you wouldn't invest if the playing field were level. This distorts the flow of capital, and it prevents the most efficient investments from receiving your business.
That's leaving aside the whole fairness issue--why this particular use of money should be subsidized.
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Old 08-01-2011, 03:52 PM   #62
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Originally Posted by rescueme View Post
Avoid? No. Defer? Yes.

Tax deferral on 40x programs is not avoidance. Somewhere along the road, you will have to pay an (unknown rate) tax.

As far as mortgage, etc. you are getting (just a general observation) a 50 cent credit on $1 in interest paid. Better than nothing, but being debt free is the target.

Just my $.02 (and it's not taxable )...
Time for some number crunching:

Assume 10% return (not adjusted for inflation) in taxable and tax deferred

For a effective tax rate bracket of 25%, that would be a 7.5% return in the taxable.

So...

1.1^30 = 17.45

vs

1.075^30 = 8.76

For the tax deferred to be an equal deal to the taxable, the tax rate on the tax deferred account would need to be about 50%.

Are we prepared to increase top tax rates to 50%? If not, then the 401K, 403B, etc. has effectively avoided paying tax.
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Old 08-01-2011, 04:02 PM   #63
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To me that's at least part of the justification of a progressive income tax; regardless of the "fairness" issue it seems to me that many nations (and empires) have been been toppled because the distribution of wealth became too concentrated. Witness France in 1789, Russia in 1917 and Cuba in 1959 among other examples (the latter two into much more despotic regimes). To that end, there is at least some incentive for the upper classes to want to avoid creating an "angry peasants with torches and pitchforks" situation where the concentration of wealth -- the gap between haves and have-nots -- becomes intolerably large for the masses.
Two comments on this issue:
1. Society always seems stunned that the rich have somehow figured out how to keep getting richer. I guess nobody ever sees that one coming.

2. I think the "peasants with torches & pitchforks" situation is more a lack of class mobility than an effect of anger over who has what. It's one thing to think "Yeah, if I work hard then I can be a millionaire" and quite another to think "I wish I knew who to bribe to get to be a millionaire". The governing systems of the three examples above didn't allow for class mobility.
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Old 08-01-2011, 04:03 PM   #64
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I think we are going to have to trim back some of the deductions that the upper middle/lower upper folks get.

The amount of income that can be removed from your taxable income is gettting a little silly.

My wife discovered that she actually has access to both a 403b and a 457 plan, and that there is no rule against funding them both to 16.5k.

So our deductions could look something like this next year--

49.5k for tax deferred income
7.5k for mortgage interest
2.5k for property taxes
7k for state income taxes
3k for charity
7k personal exemption
3k exemption for our new munchkin (is that the right amount)
12k for child care tax credit (credit of 3k, about equivalent to a 12k deduction?)

That's about 90k in income that we can avoid taxes on, although I don't know if we will be able to actually make our finances work while saving that much. I'm really tempted to try, though .

Worst case, we fund some of our living expenses out of savings.

I think we will pay less in taxes than many people with half our incomes. My single buddy who rents is getting a little bitter about subsidizing my house and child, since he makes a lot less than me.
As income goes up, allowable deduction $s go down....so yes, we get quite a number of deductions but because of our income we only get a percentage of those deductions...not anywhere close to 100%.
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Old 08-01-2011, 05:16 PM   #65
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As income goes up, allowable deduction $s go down....so yes, we get quite a number of deductions but because of our income we only get a percentage of those deductions...not anywhere close to 100%.

Also remember that a lot of people who have higher income (because we know that income does not always mean they are rich) get hit with the alternative minimum tax... my boss has over $40K of credits that he though he would get for increasing research... but so far has only taken a few thousand as he gets hit with the AMT... the other shareholders with less income were able to take 100% of their credit...

He does not think that it is fair how much they tax him.... I tend to agree..



ALSO, who determines how much more rich is to rich A lot of people seem to think that there should be an upper limit... but in reality the super rich of the late 18th and early 19th century held a bigger percent of the wealth of the country.... look at JP Morgan and Rockefeller... probably Carnigie and a few others were up there also... I would bet that as a % of GDP they were 'richer' than Gates and Buffet...
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Old 08-01-2011, 06:16 PM   #66
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Remarkable how the prospect of future riches can pacify the masses.
That might work with unemployment below 20% and a general feeling that prosperity for all is possible.

But unemployment among black men over 20 is approaching 20%. And unemployment among black men between 16 & 19 is at over 40% compared to 20% for white men in the same range. Source

I don't know what number it has to hit before the pitchforks come out.
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Old 08-01-2011, 06:31 PM   #67
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She pays into a public pension, although it doesn't appear to be very lucrative. They send a statement each year and it's lump sum value is still pretty tiny. I don't expect a whole lot from it, especially with the way public employees are getting demonized lately. Any public pension is pretty much one election away from getting gutted nowadays.

It didn't make sense to me that both plans were allowed, but she checked and they are. I doubt that we will actually fund both, but we will at least switch to the 457 so that we can take the money out anytime after she leaves her employer.

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I have never understood why this is allowed (does she also get a public pension?) and yet the 401K limit is a puny $16,500. With market returns looking very bad over the next decade, and SS questionable for those of us in our 40s, the need to put away more in a 401K and IRAs is crucial.

If you paid off your student loans and really started saving at age 30 (typical) in 2001 by maxing 401K and IRA, you might have $300,000 or so today if you are age 40. Continuing to save $21,500 a year (401K + IRA) is just not going to provide a very decent retirement if SS is taken away and you don't have a pension. *Maybe* by age 60 you will have 1 million or so, but I bet it won't have the purchasing power many think it will.

Getting the 401K limit raised to something significant, like $30,000 probably isn't going to happen though. I guess we better hope SS keeps paying 100% even for those of us in our 40s.
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Old 08-01-2011, 07:07 PM   #68
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Well, with current tax code, I'm likely to trade a 25% tax rate for a 15% tax rate, since we will have a lot of control over what our realized income will be in retirement, and our income needs will be relatively modest. Rates may go up, but I expect that they will maintain at least some progressivity in the tax code. If tax rates go up, that probably means I'm actually going to get something out of SS and Medicare, so I'll be able to deal with the higher taxes.

With the mortgage, there is just no reason to pay it off with a rate of just about 4%. I think that the stocks I am purchasing will return more than 4% over the next 15 years. Plus, if inflation kicks in, my effective mortgage shrinks dramatically. Ultimately, the tax break is just gravy to me. I'll shoot to pay off the mortgage as we retire, since we will likely be in a lower tax bracket at that time.

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Originally Posted by rescueme View Post
Avoid? No. Defer? Yes.

Tax deferral on 40x programs is not avoidance. Somewhere along the road, you will have to pay an (unknown rate) tax.

As far as mortgage, etc. you are getting (just a general observation) a 50 cent credit on $1 in interest paid. Better than nothing, but being debt free is the target.

Just my $.02 (and it's not taxable )...
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Old 08-01-2011, 08:27 PM   #69
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This phrase is seldom used with out this other phrase~ "millionaires and billionaires."
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Old 08-01-2011, 09:16 PM   #70
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