Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: MPBlue One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25275  
Subject: Re: Pre Tax Investing Date: 8/9/1999 1:35 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
<<Forget it. This has grown tiresome.

Also, don't forget that if he puts his money into a Roth, like we are talking about, there is NO tax deduction. Thus, it's all post tax money, and your witholding trick only serves to increase the amount of cash he'll have to cough up come April 15.>>

No. No. No.

Ed's point about taxable income is exactly right. There is no trick. Let's take the points in order, though:

1) Roth and traditional IRA's are very different things with very different end results. Let's leave that out of the argument.

2) One problem with traditional IRA's is that the contribution limits are not as high as 401(k) plans.

3) Let's put the witholding "trick" (sic) to bed. I'll use a numerical example. I'm going to simplify and use just income and 401(k)/IRA contributions. Everything else on the paycheck will be a wash (no net effect).

A) 401(k) Plan
Income: $10,000
Contribution Rate: 10%
Amount in 401(k) for year: $1,000
Tax Rate: 15%
A.G.Income: $9,000
Tax Paid: %1,350

B) Traditional IRA
Income: $10,000
Contribution to IRA: $1,000
Tax Rate: 15%
A.G.Income: $10,000 - $1,000 = $9,000
Tax Paid: %1,350

The only questions that remain are:
How much do you give Uncle Sam per check?
How big a refund (NOT HOW MUCH YOU OWE) come April 15?

Ed's point (I believe) is simply this. If you set your witholding at 15% for plan "A" at the beginning of the year, you will neither owe taxes, nor receive a refund.

To have the same effect (no taxes, no refund) with plan "B" you simply need to adjust your witholding to 13.5%.

As I said above, the main problem is the limitation on traditional IRA contributions. Alternatively there is the Roth IRA which does not have the same tax effects on income, but does allow larger amounts of saving.

I hope this helps.
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Saul's Investing Discussions

Why Did I Buy a Bunch of PFIE Today?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement