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URL:  http://boards.fool.com/kilmarnoch-wrote-ltlt-actually-nothing-is-10096288.aspx

Subject:  Re: Roth IRA Contriubtions & Conversions Date:  2/2/1998  5:36 PM
Author:  tc001 Number:  1591 of 76418

Kilmarnoch WROTE,
<< actually nothing is done at the marginal rate... everything is done at the effective rate. >>
and Pixy REPLIED,
<< That's absurd, and I know you know that. Many things are done at the marginal rate because every added dollar of income within a bracket costs you that bracket's rate in added taxes.>>

I know that all contributions are made at the marginal rate, as I stated in my original post. This fact *cannot* be disputed. So at least I can agree with one of you, but only on the numbers on IRA contributions and growth.

Kilmarnoch WROTE,
<<I think anyone who is *planning* for their retirement is not going to take too much of a tax bracket reduction after retirement. Most people who care what happens to themselves after retirement have a large amount of money saved away outside an IRA. Have you thought about what is going to happen to the tax
rates when SS becomes a problem? Are you expecting tax rates to go *down* long term??? >>
and Pixy REPLIED,
<<Another point we can agree on. Rates will go up. How? Who knows. Watch for the worst in the way of a flat tax, value added tax, or combination. In that case, we'll all feel the crunch.>>

I can see the basis of these comments, but cannot agree with the conclusions. First, everyone cares what will happen to themselves during retirement (excluding some type of self-destructive mental illness), but I think, statistically, the numbers on American savings, in or out of an IRA, shows a different picture about how they are planning for it.

Just look through the Fool message boards (assuming this is where the more financially intelligent people gather) and see how many people have credit card balances that are bigger than their savings (I'm only half-joking with this comment). It gets worse among the general population, many of whom still believe that SS will provide for their retirement (which it was never designed to do in the first place). Since I doubt that the average American will have a high six figure nest egg, I don't think it's true that they will be in the same or a higher effective tax bracket.

More important is the suggestion about rising taxes. You both argue that SS is in trouble, so rates will rise. I may be very wrong, but I don't think there is any SS tax on IRA withdrawals. Therefore, an SS rate increase will hit the workers, not the retirees. This doesn't result in a higher taxes for retirees.

OK, let's assume that the SS mess will be resolved by higher earned income taxes, rather than higher SS taxes. Once again, the workers pay earned income tax. Withdrawals from an IRA are not earned income. Again, the tax burden occurs during the contribution phase and does not produce higher taxes during the withdrawal phase.

Fine, you say. Let's assume that the SS mess will be fixed by taxing all income and not just earned income. Now you've just admitted that Congress has the capacity to undermine the concept of the Roth IRA by taxing its distributions. Remember, SS payments were NOT taxed for many years. To argue that taxes must go up to fix SS, and that the people with Roth IRAs are the anointed holy ones who will cleverly escape the tax demons because of a law passed 30 years before they retired, seems naive. How many tax breaks has Congress created and then eliminated during U.S. history?

Finally, the alternate tax method arguement about some type of consumption tax is thrown in. Once again, does this make a Roth IRA distribution better or does it really argue against the Roth? With a national sales tax, when you buy a television nobody is going to ask if it's being paid for with Roth funds, thereby making it free from tax :)
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