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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25234  
Subject: Re: Pre Tax Investing Date: 8/9/1999 10:26 AM
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I think what you and I are arguing about comes down to semantics. Pretax
to me means that the IRS hasn't seen that money and that they don't include
it in your income before any deductions.

Under your scenario, sure, you've increased the amount of money that you
keep each paycheck, but still you have had taxes taken out of that money.
To me, it is not pretax.

Well Tony, I don't know how to put it. The guy doesn't
have a 401k available anyway, but IF he did, the deduction for the 401k reduces his paycheck including the unwithhold taxes (assuming his withholding is adjusted to his after-401k net. In my scenario he reduces his withholding on the pay that's going to go to the IRA and takes the higher net pay, puts it aside, sends it to the IRS, takes his 1040 deduction and has less taxes to pay in the amount of the reduced withholding. Net effect: HE cuts out the gross IRA instead of his employer taking the gross 401k from his paycheck. The IRS doesn't get withholding in either case. What is the difference?
Actually the term "pretax" in this context generically means an amount invested not subject to current year's taxation, versus "after tax" being an amount that IS going to be taxed in the current year. We usually don't worry about the mechanics.
I think I have shown neither is subject to current year withholding nor taxation (if properly done, and albeit in differing amounts). I can't see your distinction. Your second statement is not true. No taxes have been taken out of the IRA money at any step. Ed
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