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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Re: 401k is funded - What now? Date: 8/31/2006 8:24 PM
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Hawkin was suggesting the possibility of higher income tax rates accross the board, not for any individual. So even if you are in the same marginal bracket, the rate for that bracket may have increased from 28% to 35%.

I don't disagree with that assumption. But make sure to understand murray's point as well. Because it is a very good point.

Right now, all of his 401k contributions are coming out of his top tax bracket. Let's assume that's the 28% bracket.

With anticipated retirement income entirely from that same 401k (and other tax deferred savings), you'll have to go through the lower tax brackets first. Using current law, the first $10k a married couple takes out of a 401k goes to use up their standard deduction. Then then next roughly $6k uses up their personal exemptions. That's $16k with no tax at all. The next $8k would get taxed at 10% (for $800 in tax), and then the next $24k would get hit with 15% (for $3600 in tax). So that's about $48k in 401k withdrawals that generate a total tax of $4400. But deferring that $48k saved tax at the 28% bracket, reducing taxes by over $13k. That's a pretty good tax savings. Even if the 10% and 15% rates are increased, as long as they both stay under 28% (and there is a standard deduction and personal exemptions) that gives a tax savings.

Now I realize that the assumption that all of the retirement income is coming from a 401k plan might not be a good one for everybody. Some people may have other sources of money. But it's the assumption that murray finds appropriate for his situation.

--Peter
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