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URL:  http://boards.fool.com/greetings-max-and-welcome-ltltsimple-math-10159338.aspx

Subject:  Re: 401(k) and foolishness revisited Date:  4/21/1998  9:57 AM
Author:  TMFPixy Number:  2958 of 86161

Greetings, Max, and welcome.

<<Simple math question though. Please correct this reasoning if I'm wrong.

Since I live in a high tax state (California), when I do the analysis I need to factor in the state tax that I'll pay on the money I'm not contributing to my 401K.

So,
TR = (Federal Tax Rate + State Tax Rate) =(0.28 + 0.09)
Ra = 0.10 / (1 - 0.37)
Ra = 0.10 / 0.63 = ~15.87%

Also, for people on the bubble of tax brackets you need to consider whether discontinuing 401K contributions will push you into the next bracket and calculate based on that.>>

That's true on both counts. However, if you itemize on your federal return, then State income tax is deductible, so you need to establish the effective rate. The effective state tax rate may be established as:

Effective State Rate (ESR) = State Rate (SR) X (1-Federal Tax Rate (FTR))

And, ESR + FTR = TR in the formula under those conditions.

Regards….Pixy




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