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Author: patientlyTrying Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76399  
Subject: Joining Retirement ideas Date: 1/3/2005 10:43 AM
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I just got engaged and my fiance and I are beginning to "merge" our investment theories. Currently, I invest 16% of my income into my retirement account through work. He only invests 8% (the max amount our company matches). I'm the one who's been more into investing and so I'm trying to figure out what the best solution for us would be. We both make about the same amount, so figure we should save about the same.
I've heard repeatedly how great Roth IRAs are but haven't opened one myself. So, I looked into a Roth IRA, but if we decide to file jointly, I don't think we'll be able to invest in one of those. Are there other options? How do you decide if you'll be in a higher tax bracket when you retire? Also, I saw that someone mentioned in a different post that with a 401K you have to take it all out in a lump sum when you retire. Did I get this wrong? Will I have to take it all out and pay taxes on it as if I had earned it all that year? I'm 26 and trying to get this all figured out now. Any help or advice is greatly appreciated.
Thanks!
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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43841 of 76399
Subject: Re: Joining Retirement ideas Date: 1/3/2005 10:59 AM
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With a 401K you do not have to take a lump sum. However, when you leave the company, for retirement or otherwise, most people recommend rolling it over to an IRA because you have more options, particularly with a brokerage like Ameritrade or Brown.

I do not remember at this time what the income limits are for the Roth IRA, but so long as you are not married all you have to consider is your own income(s) separately.

When you take money out of your IRA on retirement, you have to do it based on your life expectancy, or joint with your spouse. If the minimum that you have to take out puts you in a higher bracket, consider yourself very fortunate - or more accurately very responsible.

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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43858 of 76399
Subject: Re: Joining Retirement ideas Date: 1/3/2005 5:31 PM
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So, I looked into a Roth IRA, but if we decide to file jointly, I don't think we'll be able to invest in one of those.

Once you're married, if you decide to file separately, you almost certainly will not be able to invest in a Roth IRA. If you decide to file jointly, you may or may not be able to invest in Roth IRAs, depending on your joint Modified Adjusted Gross Income. (The income phase out for MFJ started at $150,000 in 2004, I'm not sure where it starts now, in 2005.) If you're not married yet, you may still be elegible for making 2004 Roth IRA contributions based on your 2004 incomes as separate individuals. If your modified adjusted gross income was low enough (I think the phase out starts at $95,000 for 2004), you can contribute to a 2004 Roth IRA up to Tax Day (usually April 15), 2005.

Are there other options?
With current qualified dividend and long term capital gains taxes low, investing in low-churn, low-fee stock mutual funds or buy-and-hold into individually researched stocks is more tax friendly now than it has been in a long time. Of course, those low rates are set to expire in the absence of Congressional and Presidential action, so caveat emptor...

My current choice, should my wife and I ever be at the point where we would be inelegible for Roth IRA contributions, is a non-deductable Traditional IRA, for the reasons put forth in this post: http://boards.fool.com/Message.asp?mid=20490640

How do you decide if you'll be in a higher tax bracket when you retire?
You stick a finger in the air, guess which way the political winds will be blowing, and guess - Seriously. If you want to, you can run some spreadsheet or calculator-driven estimates based on your expected assets, the form those assets will be in (Traditional IRA, Roth IRA, 401(k), pension, annuity, regular brokerage account, etc...), the current tax laws as you expect them to apply when you're ready to retire, and your expected draw-down patterns. I personally use a number between 30% and 40% across federal and state, varying based on how aggressive or conservative I want to be.

I saw that someone mentioned in a different post that with a 401K you have to take it all out in a lump sum when you retire. Did I get this wrong? Will I have to take it all out and pay taxes on it as if I had earned it all that year?
That is not usually true. There is occasionally an advantage to taking an "in-kind lump sum distribution" if a 401(k) is very heavily concentrated in stock of the employing company that has appreciated significantly over its basis price. For most people however, that's not the case. Additionally, if the 401(k) balance is low enough ($5000 or below, if I remember correctly), the employer may have the option to require you to roll it over to an IRA or take another distribution following your separation from service.

Best of luck to you,
-Chuck

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43860 of 76399
Subject: Re: Joining Retirement ideas Date: 1/3/2005 6:20 PM
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I have also heard the analysis that says that a Roth is much better than a 401k or Traditional IRA because the money will be tax free decades from now when you will be in a retired and in a high tax bracket.

I am skeptical that this will actually be the best case for most people because there are so many things that can come up that will cause even a well-planned retirement nest egg to be smaller than expected. Additionally, once you are in your fifties(or even fourties) and have amassed a significant amount of money then you may choose to retire early on a more modest income (and lower tax rate) rather than working until you are in your mid 60's and being even richer (and paying higher taxes).

Looking at it pessimistically and assuming that you make the wrong decision you could end up in either of these situations as the worse case scenario.

1) You have lots on money in a TIRA/401K type accounts and have to pay a higher tax bill before you go off on your spring cruise.

2) You pay your current tax rate now when you put you money into a Roth IRA but you end up short of money in retirement and end up withdrawing the many in meager years when you pay next to no taxes anyway.

Lots more downside in the second scenario.

It is really just a matter of guesswork on what will happen in your life over the next 40 years or so AND what the tax laws will be 40 to 70 years from now. In reality a mixture of accounts type will probably be best when you retire but I would concentrate on getting a good retirement “foundation” mostly in the TIRA/401K type accounts first.

One way to improve your saving plan is to commit to increasing your savings by one half of any future pay increases, even in an after tax taxable account if you max out all the possible retirement accounts. This is painless and has worked for a lot of people.

Greg


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Author: Fletch52 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43918 of 76399
Subject: Re: Joining Retirement ideas Date: 1/6/2005 8:30 PM
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In looking at the two scenarios here is how I see the two. The IRA is the only option that may help lower your taxes in the present. In the future you probably won't know what rate of taxation you will pay when you pull out the funds.

With the Roth IRA there is no tax savings in the present. However in 35 or 40 years from now there will be zero tax when you pull the money out. Therefore if you need exactly $10,000 in 2045 you can safely predict that you can obtain that money by withdrawing that exact sum from your Roth IRA.

Fletch52

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