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Subject: Re: Roth IRA Contriubtions & Conversions  Date: 2/2/1998 2:56 PM 
Author: TMFPixy  Number: 1579 of 79728 
Kilmarnoch, Interesting analysis. You are obviously an advocate of effective tax rates, but you missed a very key point that negates totally your comments about my use of marginal tax rates. Remember, I said: << John makes a taxdeductible contribution of $2,000 per year to a traditional IRA. He is considering the new Roth IRA, but must maintain the same net income he has today using the traditional IRA. John is in the 28% marginal tax bracket, which means he may only contribute $1,440 to a Roth IRA to keep his net income the same as it is by using the traditional IRA.>> In your argument for using effective rates, you said: << John makes $40k per year, so his effective tax rate is 19.99%....if he put 2000 into a traditional IRA he would get $399.78 back in a tax refund.>> Both statements are true. There's a big difference between what a person "makes" before taxes and what he "nets" after taxes. If John adds $2K to his current taxable income in my scenario, he will pay $560 in additional income tax for the privilege, not an effective $399.78 as you would have it. To keep a net income of $40K, he's got to pay taxes of $560 or his net income must drop. If his taxable income using the traditional IRA is $51,105, he nets $40K. If he foregoes the IRA deduction for the Roth, his taxable income jumps to $53,105. 