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Author: 3muttsmom 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 25223  
Subject: Re: Convert 401 k to IRA to Roth IRA Date: 3/20/2005 2:36 AM
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Pauleckler:

It turns out that if the tax rate paid on the $1000 is the same as the tax rate paid on the funds in retirement, the value of the two experiments is identical. Mathematically this experiment reduces to the after tax percentage, times the compound interest formula, times $1000. Hence, you are comparing A x B x C with B x C x A. They are identical.

Okay, this is what I don't get about this calculation and the Fool calculator makes the same assumption.

TODAY, everything we make MFJ up to like $58k is taxed at <25%. Everything we make over $58k is taxed at >25%. If I put $$ into my 401k or a TIRA, I'm saving 25% right off the top.

Now, the conventional wisdom is that if tax rates, i.e. tables, remain the same (which, btw is NOT the same as what you said), I'll pay the same amount of tax whether I put the money into a ROTH or TIRA/401k. But, the reality is that this is NOT so, since with this assumption I'm again getting the first $58k at <25%. As such, I've paid >25% taxes today on the ROTH contributions in order to receive <25% on the withdrawals up to $58k in retirement.

While one's marginal tax rate will ALWAYS apply to the money going IN, it doesn't apply to ALL the money coming out.

So, what am I missing?

3MM
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