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Author: drbear One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121258  
Subject: Re: Roth Revisited-Recalc. Requires Review (Real Date: 2/12/1998 6:17 PM
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Roxor replied:
<<However, once you decide to COMPARE the conventional versus a Roth, you have to include other germain facts, such as the up-front $777.78 tax liability you incur by selecting a Roth. To draw an analogy, it would be as if opening a Roth required a $777 "processing fee"--you would somehow factor that into your comparison, wouldn't you?

Otherwise, the analysis is skewed in favor of the Roth (which explains why so many people are fooled into thinking the Roth is superior.) If you ignore the major negative factor of the Roth (the up-front tax payment) of course it looks like a great investment vehicle!

My approach is correct because it accurately levels the playing field.>>

Ooh boy. You know, Drbear realized he should have included an example when he first sent this reply. I can understand why you think yours is the correct approach, but let me outline the methodology I'm following, and if you still disagree, please send a reply to this message outlining yours.

Example:

Roxor and Drbear each make $2,777.78 in income this year and are taxed at a flat 28% rate (and it doesn't matter if we make it $102,777.78 because we're just going to be using the marginal rate on the last dollars earned).

DrBear wants to open a Roth. I take $2000 of my income and put it into the Roth; the remainder is paid in taxes. So the calculation is:
Remaining balance = Taxable income - tax - Roth cont
$0 = 2,777.78 - 777.78 - 2000.00

Roxor opens a deductible IRA. You take the tax deduction up front, but only on the 2000.00 contribution. You still owe tax on the remaining $777.78. Using the same formula:
Remaining balance = Taxable income - tax - IRA cont
$560 = 777.78 - 217.78 - 2000.00

You aren't getting that extra $777.78 in your pocket to invest when you open the deductible IRA because you still have to pay tax on the portion that didn't go into the IRA; you're only getting $560. That's the tax advantage you get up front, and $560 will always be the difference between the two approaches no matter what income figures you plug in at a tax rate of 28%. That's what the orginal analysis was trying to compare: what is the difference between funding a Roth vs. funding a deductible IRA.
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