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Author: jpato Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: Pre vs Post Tax & LTBH Date: 6/1/2000 12:58 PM
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Please excuse this post if it has been discussed in earlier posts, after a quick scan a some of the 401k posts, I only have more questions. Anyway,

Seems the conventional wisdom is pretax into company 401K plan. Pay the tax later.

Does the withdrawl of the funds get paid at the future tax rate (e.g.year 2030) or the rate at contribution (year 2000)? From what I've read, yes future rate but can be (at this time) average over ten years.

Would it be better to pay a lesser tax rate now than later or does the effect of reducing the Adjusted Gross Income each year win out over the long haul? Is it equal? Of course I am assuming taxes will rise. Not sure why :->

Does the future withdrawl affect the tax bracket at time of withdrawl? Again, from other posts I think it does but am I correct to say that the withdrawl can be limited (non lump sum) to an amount that leaves the AGI less than the higher tax bracket?

Just thought of this, suppose one holds company stock long term, to a point of acquiring an amount that adjusts the income bracket up. How is the tax calculated on the the sale? I would guess at the time of sale not purchase.

Thanks for the patience, this started with a simple question.
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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: 36226 of 121144
Subject: Re: Pre vs Post Tax & LTBH Date: 6/3/2000 2:37 AM
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Seems the conventional wisdom is pretax into company 401K plan. Pay the tax later.

Does the withdrawl of the funds get paid at the future tax rate (e.g.year 2030) or the rate at contribution (year 2000)? From what I've read, yes future rate but can be (at this time) average over ten years.


Based on current tax laws (I'm not qualified to guess at what they'll be in 2030 <grin>) the tax on the withdrawl is based on your income in the year of withdrawl.

Would it be better to pay a lesser tax rate now than later or does the effect of reducing the Adjusted Gross Income each year win out over the long haul? Is it equal? Of course I am assuming taxes will rise. Not sure why :->

It mostly depends on how far apart "then" and "now" are. Paying tax on a given amount at 15% this year is probably better than paying at 28% next year. The spread in the tax rates isn't overcome by compounding of earnings over a single year. Over longer terms, the loss of compound earnings on the taxes paid becomes an increasingly higher price. Using the current spread between the 15% and 28% brackets, and earning a compound 10% a year, it would take only about 7 or 8 years to come out ahead by paying the taxes in the future.

Does the future withdrawl affect the tax bracket at time of withdrawl? Again, from other posts I think it does but am I correct to say that the withdrawl can be limited (non lump sum) to an amount that leaves the AGI less than the higher tax bracket?

Assuming that current tax laws will be substantially the same as now (a major assumption, I know) then, yes. The withdrawl can certainly affect the tax bracket. And yes, it's quite possible to take out only enough to "fill up" a bracket without crossing into a higher bracket. (Caveat - there are minimum withdrawl rules that can come into play, so there may be some limitation on your ability to use this technique. Currently, the problems start at age 70 1/2.)

Just thought of this, suppose one holds company stock long term, to a point of acquiring an amount that adjusts the income bracket up. How is the tax calculated on the the sale? I would guess at the time of sale not purchase.

Again correct, the taxable income at the time of sale is important. The bracket at the time of purchase is completely irrelevant.

Thanks for the patience, this started with a simple question.

Hope this has helped a bit.

--Peter

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