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Greetings, TC001, and welcome.

<<My question (as usual, if you've seen any of my posts on the tax board) is why the after-tax regular IRA is being calculated as though the entire tax is paid at the marginal rate? Contributions are made at the marginal rate, but withdrawals aren't necessarily so.
I suppose if the IRA withdrawals are on top of, let's say, a 401k disbursement, then they could all be at the marginal rate. As a realist, I'm not convinced that most Americans are going to have combinations of SS, 401K, IRA, inheritance savings, lottery winnings, or whatever else, pumping up their cash flow during retirement to force payouts at the marginal rates.

Any explanation as to why everyone (here, in the paper, in magazines, on television - everywhere I look) does it this way? What am I missing?>>

I see that Kilmarnoch gave you an answer from his perspective, so I'll give you mine. Needless to say, we don't see eye-to-eye on this issue. Take my word for it, our friend Kilmarnoch is wrong. :-P

Most analyses use the marginal rate not so much because it's "easy" but because they are treating the contribution as one made from incremental income or from the last dollars earned and taxed. They do the same for withdrawals. In other words, they don't say withdrawals puts a person in that bracket, but that the person is already there and the withdrawals represent the last dollars of income.

The effective rate used by Kilmarnoch is a legitimate approach if you ignore net income and instead look at income before taxes. I use marginal rates for contributions because those dollars are the last ones taxed. I use it for withdrawals as well because I have to assume something in a scenario. I assume a person would be in a particular tax bracket regardless of the withdrawal. Therefore, I treat withdrawals as the last dollars of income taken, and those dollars would be taxed at the marginal rate.

On the contribution issue, I think it's no contest. Use of marginal rates is appropriate. On the withdrawal issue, the answer is a toss up based on the assumptions regarding total income in the case under consideration. In that case, either approach is appropriate and realistic provided the assumptions are stated.


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