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Author: JCook9 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25316  
Subject: 401 k help Date: 11/12/2002 1:52 AM
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This being my first time to post on this board, i hope no one minds me going straight to asking questions about a problem i have.

In january, i will be starting my first real job, and i have to decide what i should do for saving. My company offers a 401k plan that is through merril Lynch. From my understanding, there is no company match included in this deal.

I would like to hear comments on investing in ira's instead of the 401.

I understand that the 401 contributions are pretax.....which i think a regular roth is comparable to..

I also find value in having more options to where my money is invested than the ten or so funds offered by ml.

While i am asking.....are there anythoughts as to how much should be saved a year, for a guy in his early twenties making like 40k.
Thanks for any help offered
J
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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15515 of 25316
Subject: Re: 401 k help Date: 11/12/2002 2:59 AM
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I would start off by saving 10% of your pretax income into your 401k. That would be @$4000 per year. Then, as you recieve any raises, allocate a percentage of that raise to your 401k. For example. I just recieved a 4% raise. I took 2% and increased my 401k witholding to 15% and sent the other 2% to my ROTH IRA. This change, based upon my income level of @$60k per year, gives my @$9000 annual 401k savings, plus @$1200 to my ROTH. Neither one meets the maximum allowances.

The 401k this year is $11000 and the IRA is $2200 (correct my if I'm wrong).

You have over 40 years before your supposed retirement age, so even if you are using Merrill Lynch (you have no choice here) go for a mix of @65% Aggressive Growth style funds, maybe 2, a Large and a Small Cap, @15% International Growth Fund, 15% in a Total Stock Market Index fund and the balance in a Total Bond Index fund. Of course these numbers may be tempered by what is available for you to choose.

Also, be very sure about if any funds have fees associated with them. For example, if you have a choice between 2 "like" style funds, with similar 10 year return rates, are there any internal fees that are higher in one verses the other. It might seem trivial but compounded over the long term it makes a big difference.

Also, remember, your 401k money, when you leave the company, can be transfered either into your new employeers 401k acounts, if they have any, stay in your ex employeers funds or be dispersed into IRA accounts that you direct. Then, you get to pick the mutual funds or other avenues to invest. You can even convert those 401k funds after you leave the company into ROTH IRA accounts, but the funds become taxable income, so be very careful when doing this, especially if it is a large dollar amount.

Personally, I recommend maximizing your 401k deposits until you can't stand it and fund a ROTH IRA on a weekly, or biweekly period. It's easier to live with when you put small regular dolar amounts than trying to cough up a few hundred or thousand dollars at a time.

Starty with the 401k at 5%, then slowly, say every 3 months, increase it 2%, until you hit the maximum for the year. That would be @ 28% of your pretax income - a very large amount to sock away. But, if you slowly ease into it you can learn to live with it, especially if you have some type of regular annual raises.

No matter what, start...Time is on your side as far as compounding your early deposits and dollar cost averaging those deposits. Especially now that the market is "down", it will go up, and you cannot afford to be out of it.

cat

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Author: BookmFool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15516 of 25316
Subject: Re: 401 k help Date: 11/12/2002 9:01 AM
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Greetings JCook9:
In january, i will be starting my first real job, and i have to decide what i should do for saving. My company offers a 401k plan that is through merril Lynch. From my understanding, there is no company match included in this deal.

I would like to hear comments on investing in ira's instead of the 401


Given that you'll receive no company-matched funds with your plan, and that it's administered by ML (SEE: high expense ratios), I'd be swayed in the other direction than the previous response. If those two negatives weren't the case, the 401k would be a good first choice, but those are too big to ignore. You can open a Roth with a discount broker and have your pick of mutual funds, instead of choosing from ML's wallet-gouging funds. My opinion would be to do the Roth first. Then, since IRA contribution limits are only $3000, you could then look towards your 401k plan. For more on IRA's check www.irs.gov , particularly publication 590 for more details.

I understand that the 401 contributions are pretax.....which i think a regular roth is comparable to.

401k's are pretax (mostly), but no, contributions to a Roth IRA are not. This money has already been taxed, but current tax law allows for qualified tax-free withdrawals. Whereas withdrawals from a 401k will be taxed at one's ordinary tax rate.

For several more opinions on your dilemma, follow the links below to discussions on 401k's versus IRA's. The first link is a brief article that mentions some drawbacks to 401k's:
http://boards.fool.com/Message.asp?mid=18055354

The next thread (which is quite long) should be very helpful, especially look for the message from MarkOYoung. Keep in mind his assumption is for plans that DO match funds:
http://boards.fool.com/Message.asp?mid=16368177&sort=whole#16368369

This final message also has a few links to some resources to help you too, along with some questions for you to answer about your plan to determine if it's worth your money:
http://boards.fool.com/Message.asp?mid=14092182

HTH

Bookm



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Author: MarleysGhost Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15517 of 25316
Subject: Re: 401 k help Date: 11/12/2002 9:05 AM
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to catscanner:

IRA maximum contribution in 2002 is $3,000

to JCook9:

I'd put the maximum the plan allows into the 401(k) right from the start, and allocate the investments among various asset classes, the majority of which should be to stocks.

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Author: JCook9 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15518 of 25316
Subject: Re: 401 k help Date: 11/12/2002 12:07 PM
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I'd like to thank everyone for their replies. I probably wasn't clear enough in asking my questions, but bookemfool was pretty close to what i was looking for. I am not happy about only having the ten or so ml funds to chose from, and i think for the time being ira's might be a good option.

This isn't the ira board, but i am trying to understand them a little better. I believe regular ira's contributions are tax deductible, which would offset the fact that 401's use pretax dollars. I also would like to know if you can have and contribute to two ira's in the same year. I already have a roth, but I am thinking that if i can have both.....i could contribute six or so thousand a year to these two accounts and avoid the 401 all together. If anyone has anything else they can can add...i truely appriciate it.

Thanks
J

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Author: MarleysGhost Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15519 of 25316
Subject: Re: 401 k help Date: 11/12/2002 12:53 PM
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A couple of thoughts.
If you're not going to be at this job for more than a few years, maybe your next job will have an upgraded plan, which you'd then be able to roll the original savings into. In the meantime, you've managed to save roughly double the max in the IRA, tax deferred. I think this may trump the importance of Merrill's fees.

Also, don't forget about the non-refundable credit for retirement plan contributions that will appear for the first time on the tax return for 2002. It sounds as though you'd be eligible to claim a 10% credit for your contributions to 401(k)'s or IRA's on up to $2,000 of contributions.

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15520 of 25316
Subject: Re: 401 k help Date: 11/12/2002 1:12 PM
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401k's are pretax (mostly), but no, contributions to a Roth IRA are not. This money has already been taxed, but current tax law allows for qualified tax-free withdrawals. Whereas withdrawals from a 401k will be taxed at one's ordinary tax rate.

Let me add that at your age and income, a Roth is apetizing. Although you pay tax before your contributions ($3000 a year for next year), you are likely to pay higher taxes if you wait to start a Roth when your income is higher.

If you are just starting out, however, it may be a goal to maximize your usable income and reduce taxes in which case a pre-tax 401K or traditional IRA is advantageous.

A few other things:

1) Are you planning for yourself or a family? In the case of the former you may be considering buying a first home. In the case of the latter, you may also need to consider saving for college. With a Roth, after 5 years you can withdraw original contributions without penalty if needed (although I am not endorsing the practice). With a 401K you can take out loans but it costs you.

2) Have you fully explored Merryl Lynch? Employers are notorious for not educating their employees well on how to use a 401K, but the the host financial vendor has a wealth of information and tools on-line that you can use to research your fund options and devise a retirement investment strategy.

3) Take control over your financial destiny. Answer a few questions for yourself:

- What is your retirement goal? This is often a hard question for young people to answer but it is important to establish a goal and stick to it.

- What is your risk aversion? Young people tend to be more risk averse, especially after the last couple of years, because they have a hard time envisioning how $100 a month can grow into hundreds of thousands. Generally you want to take more risks when you have a long ways to go, and fewer risks when you are approaching retirement.

- What is your asset allocation? There are a lot of strategies out there, but a common one is to invest heavily in stocks when you have 20+ years before retirement and move towards more conservative investments as you seek to preserve you nest egg. Sub-allocation by small, medium and large cap, value and growth, as well as international should be part of your strategy.

Hope some of this helps and meets Fool approval.

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15521 of 25316
Subject: Re: 401 k help Date: 11/12/2002 1:16 PM
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I am not happy about only having the ten or so ml funds to chose from, and i think for the time being ira's might be a good option.

It depends on what funds. If you put in $3000 into an IRA (Roth or Traditional), you probably can only select 3 funds ($1000 ea) and some brokerages charge account maintenance fees for balances under $10k. You may have a larger pool to choose from, but your chances of landing the big fish gets smaller.

If the 401K plan offers a diverse 10 funds which have strong track record and positive potential, they are worth considering. Don't discount them until you have researched them. Look into the Mutual Fund board to learn some tips for how to evaluate funds and then apply the knowledge to the 401K plan.

In other words, don't take our word for it - do your own research. That is the real trick to investing.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15522 of 25316
Subject: Re: 401 k help Date: 11/12/2002 1:20 PM
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JCook9,

You wrote, This being my first time to post on this board, i hope no one minds me going straight to asking questions about a problem i have.

No problem. Ask away.

Also, In january, i will be starting my first real job, and i have to decide what i should do for saving. My company offers a 401k plan that is through merril Lynch. From my understanding, there is no company match included in this deal.

I would like to hear comments on investing in ira's instead of the 401.


Likely in your case, an IRA will have more options. Given that you're just starting in your profession, you will likely have pay raises that exceed inflation and your future income and tax rates will exceed your current levels. For this reason, choosing to invest in a Roth IRA now is a good idea. It means you will still pay taxes at today's rates; but when you retire, it will reduce your tax burden. Given that you will likely be in an equal or higher tax bracket when you retire, this is a good thing.

Also, consider contributing to a conventional IRA instead of your 401(k). You should be able to contribute to both types in the same year. I suspect you won't be able to afford to max out both contributions. However, you should be aware that if you contribute to any 401(k) during the year, your conventional IRA contributions will not be tax deferred. This is a very important point to note and is why I would say you should either stick with the conventional IRA or the 401(k); but avoid doing both.

You also wrote, I understand that the 401 contributions are pretax.....which i think a regular roth is comparable to..

No, a 401(k) contribution is pre-tax -- tax-deferred. A Roth contribution is post-tax. That means you pay taxes on the 401(k) contribution as you withdraw the money in retirement. You pay taxes on the Roth contribution in the year you make the contribution; but any earnings are tax-exempt. Each have their advantages. Which is better depends on whether you will be in a higher tax bracket in the current year; or in retirement.

Also, I also find value in having more options to where my money is invested than the ten or so funds offered by ml.

Which is why I would consider the conventional IRA route along with a Roth. Of course, you may be able to afford more than the combined maximum IRA contributions. In that case, I would say it's more important to have a safe place to accumulate assets -- you can always roll your 401(k) money into an IRA when you changes jobs -- so you should consider sticking with a Roth and your 401(k).

Finally, you wrote, While i am asking.....are there anythoughts as to how much should be saved a year, for a guy in his early twenties making like 40k.

Try using one of the many retirement calculators available. ( For instance: http://www.fool.com/calcs/calculators.htm#ret or http://www.quicken.com/retirement/planner/ ) The amount you should save depends on a number of factors, including your own expectations for retirement. Try experimenting with these calculators to help you form a plan for achieving your retirement goals.

- Joel

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Author: BookmFool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15523 of 25316
Subject: Re: 401 k help Date: 11/12/2002 1:32 PM
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Greetings again JCook9:
I believe regular ira's contributions are tax deductible...
Yes, traditional IRA contributions are.

I also would like to know if you can have and contribute to two ira's in the same year.
Yes, there is no limit on the number of IRAs one can have...

I already have a roth, but I am thinking that if i can have both.....i could contribute six or so thousand a year to these two accounts and avoid the 401 all together.
...but the total annual contribution of $3000 is for one IRA or 5. Meaning, the total dollar amount you can contribute to IRA accounts is $3000, not $3000 to each IRA you have. You mentioned in you first post your income. Your income would place you right in the middle of the traditional IRA phase-out range, meaning only a portion of that contribution would be tax deductible (for 2002 the range is $34,000-$44,000). For 2003, that range increases its limits to $40,000-$50,000, so if your income stays the same next year the full contribution would be deductible. Generally, a traditional IRA is great for people who will probably be in a lower tax bracket when they retire, since the money is taxed at that tax rate when it's withdrawn.

These two links will help you better understand both types of IRA's:
http://www.fool.com/money/allaboutiras/allaboutiras03.htm
http://www.fool.com/money/allaboutiras/allaboutiras01.htm

HTH

Bookm

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15524 of 25316
Subject: Re: 401 k help Date: 11/12/2002 1:36 PM
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JCook9,

You wrote, This isn't the ira board, but i am trying to understand them a little better. I believe regular ira's contributions are tax deductible, which would offset the fact that 401's use pretax dollars. I also would like to know if you can have and contribute to two ira's in the same year. I already have a roth, but I am thinking that if i can have both.....i could contribute six or so thousand a year to these two accounts and avoid the 401 all together. If anyone has anything else they can can add...i truely appriciate it.

Yes, a conventional IRA's contributions are effectively pre-tax because of the tax deduction. But that's not true of a Roth IRA.

Yes, you may be able to avoid the 401(k) altogether. Just remember that there are rules that can affect the tax-deferred status of your conventional IRA contributions. Essentially, if you or your spouse are eligible for any kind of employer-funded retirement benefit, your IRA cannot be deducted from your taxes.

For instance, any kind of defined-benefit (pension) plan makes your conventional IRA contribution taxable. Also, if your employer contributes just one dollar to your 401(k); or any other approved, tax-advantaged retirement plan, your conventional IRA contributions become taxable. However, so long as your employer makes no contributions to your 401(k) and provides no other retirement plan benefits, you can probably deduct a conventional IRA contribution from your taxes.

A lot of if's, I know. But that's our tax system for you.

- Joel

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15525 of 25316
Subject: Re: 401 k help Date: 11/12/2002 1:38 PM
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BookmFool,

You wrote, Your income would place you right in the middle of the traditional IRA phase-out range, meaning only a portion of that contribution would be tax deductible (for 2002 the range is $34,000-$44,000). For 2003, that range increases its limits to $40,000-$50,000, so if your income stays the same next year the full contribution would be deductible.

Excellent point.

- Joel

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Author: BuyLower Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15526 of 25316
Subject: Re: 401 k help Date: 11/12/2002 2:59 PM
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Given that you're just starting in your profession, you will likely have pay raises that exceed inflation and your future income and tax rates will exceed your current levels. For this reason, choosing to invest in a Roth IRA now is a good idea. It means you will still pay taxes at today's rates; but when you retire, it will reduce your tax burden. Given that you will likely be in an equal or higher tax bracket when you retire, this is a good thing.

When you retire aren't you likely have less deductions? Mortgage interest being a large contributor is greatest when you first purchase the house and gradually decreases. If are in the beginning stages of a mortgage and can afford the Roth contributions, would it make more sense to fund a Roth over other pretax vehicles (with the exception of any matches given)? You will also likely not have any dependants once you retire. Seems to me deductions should also factor into your calculations as well.

Comments and higher powered crystal balls welcome...

buylower


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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15527 of 25316
Subject: Re: 401 k help Date: 11/12/2002 3:21 PM
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buylower,

You wrote, When you retire aren't you likely have less deductions? Mortgage interest being a large contributor is greatest when you first purchase the house and gradually decreases. If are in the beginning stages of a mortgage and can afford the Roth contributions, would it make more sense to fund a Roth over other pretax vehicles (with the exception of any matches given)? You will also likely not have any dependants once you retire. Seems to me deductions should also factor into your calculations as well.

The home mortgage interest deduction is worth a lot less than you might think. If you were paying 6.25% (my own rate), the interest on the first $125,600 of your mortgage is not tax deductible. Of course that doesn't consider that you might have property taxes to pay as well.

I still owe $82K on my home. I won't be filing a schedule A this year. Last year, it saved me only about $100 in taxes. Of course, I live in a relatively inexpensive part of the country too.

That said, I think you should contribute to a Roth while your tax bill is relatively low. So yes, that might be when you have more deductions; but personally, I think the level of income is the primary factor and deductions are secondary. Still, consider your own situation carefully.

- Joel

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Author: JCook9 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15528 of 25316
Subject: Re: 401 k help Date: 11/12/2002 4:36 PM
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Thanks for all the help everyone.....just what i was looking for.

J

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15531 of 25316
Subject: Re: 401 k help Date: 11/13/2002 12:49 PM
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Yes, a conventional IRA's contributions are effectively pre-tax because of the tax deduction. But that's not true of a Roth IRA.

I am pretty sure that in the case of a 401K pre-tax contribution, the withholding is based on the remaining taxable amount. In the case of a traditional IRA, the deduction is not taken until the return is filed the next year.

In other words, from perspective of withholding, there is no difference between a Roth and Traditional IRA. The split comes on April 15th when you are able to reduce your taxable income for the Traditional IRA contributions whereas you can not do so for your Roth contributions.

It is a small distinction, but it may be important to you that you have the maximum income from your paycheck (less withholding with a 401K), or to receive a refund the following year (Traditional IRA), or neither (Roth IRA).

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Author: BookmFool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15536 of 25316
Subject: Re: 401 k help Date: 11/13/2002 2:30 PM
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I had a question for Joel on something in your post. Here's the statement:
...if you or your spouse are eligible for any kind of employer-funded retirement benefit, your IRA cannot be deducted from your taxes.

For instance, any kind of defined-benefit (pension) plan makes your conventional IRA contribution taxable. Also, if your employer contributes just one dollar to your 401(k); or any other approved, tax-advantaged retirement plan, your conventional IRA contributions become taxable.


Now in IRS pub 590, Chapter 1 which deals with traditional IRA's, page 14, something else is stated. If you look at Table 1-2 Effect of Modified AGI on Deduction if Covered by Retirement Plan at Work - If you are covered by a retirement plan at work, use this table to determine if you modified AGI affects the amount of your deduction. The table shows that even if JCook9 contributed to a retirement plan and makes $40,000, he can still take a partial deduction. But if I were single and made $30,000/year and I contributed to my work's 401k, I could still deduct my contribution to a traditional IRA up to the maximum allowable contribution. Actually page 2 has the 2002 changes, which the ranges are $34,000-$44,000 for a single filer, $54,000-$64,000 married.

If I'm reading this wrong, tell me.

Bookm

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15538 of 25316
Subject: Re: 401 k help Date: 11/13/2002 3:05 PM
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BookmFool,

You wrote, Now in IRS pub 590, Chapter 1 which deals with traditional IRA's, page 14, something else is stated. If you look at Table 1-2 Effect of Modified AGI on Deduction if Covered by Retirement Plan at Work - If you are covered by a retirement plan at work, use this table to determine if you modified AGI affects the amount of your deduction. The table shows that even if JCook9 contributed to a retirement plan and makes $40,000, he can still take a partial deduction. But if I were single and made $30,000/year and I contributed to my work's 401k, I could still deduct my contribution to a traditional IRA up to the maximum allowable contribution. Actually page 2 has the 2002 changes, which the ranges are $34,000-$44,000 for a single filer, $54,000-$64,000 married.

If I'm reading this wrong, tell me.


Dooh!

Once again you've caught me. I keep forgetting those blasted income limits. Obviously they don't affect me personally (I'm 38 years old and my income has already plateau'ed above them in my choosen profession), so I keep forgetting to consider them when I talk with someone else. Thanks for catching me.

- Joel

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15554 of 25316
Subject: Re: 401 k help Date: 11/18/2002 1:36 PM
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The home mortgage interest deduction is worth a lot less than you might think. If you were paying 6.25% (my own rate), the interest on the first $125,600 of your mortgage is not tax deductible. Of course that doesn't consider that you might have property taxes to pay as well.

You have to consider the other items you can deduct. If I consider the deductibility of state income taxes and property taxes first, I exceed the standard deduction. Therefore every dollar of interest on my mortgage is tax deductible.

IF


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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15555 of 25316
Subject: Re: 401 k help Date: 11/18/2002 3:21 PM
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IndecisiveFool,

You wrote, You have to consider the other items you can deduct. If I consider the deductibility of state income taxes and property taxes first, I exceed the standard deduction. Therefore every dollar of interest on my mortgage is tax deductible.

Well, I did mention property taxes. Thankfully, I live in a state that doesn't have an income tax. Personally, I'd rather pay less in taxes and not be able to deduct my mortgage.

- Joel

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15556 of 25316
Subject: Re: 401 k help Date: 11/18/2002 3:58 PM
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Well, I did mention property taxes. Thankfully, I live in a state that doesn't have an income tax. Personally, I'd rather pay less in taxes and not be able to deduct my mortgage.

I would also like to pay less taxes. Usually a state will find a way to get your money, either through property taxes, income taxes, sales tax, or some combination of these taxes and other taxes.

IF


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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15557 of 25316
Subject: Re: 401 k help Date: 11/18/2002 4:04 PM
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Well, I did mention property taxes. Thankfully, I live in a state that doesn't have an income tax. Personally, I'd rather pay less in taxes and not be able to deduct my mortgage.

If you are bored, you can view the state comparisons on tax rates and tax burdens at http://www.taxadmin.org/fta/rate/

IF

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15558 of 25316
Subject: Re: 401 k help Date: 11/18/2002 6:00 PM
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IndecisiveFool,

You wrote, I would also like to pay less taxes. Usually a state will find a way to get your money, either through property taxes, income taxes, sales tax, or some combination of these taxes and other taxes.

Sales taxes are a bit deceptive. Not every expense is taxed. Not all are taxed at the same rate -- ex: gas & phones. The Texas state sales tax rate is 6.25%. The Dallas area has an additional 2% local tax -- the maximum allowed by state law. But less than 1/3 of my gross income goes toward taxable purchases.

More burdensome are our property taxes. Property taxes are 2/3 of my local/state tax burden. Even so, that burden is less than 6% of my gross. Some states go as high as 11% on just the income tax. And just because they have an income tax doesn't mean they don't also have a sales tax.

In general, I think Texas government is relatively cost-effective. When I say realtively, I mean relative to the per-capita cost in other states. And at least half that money goes toward public education.

- Joel

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