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Pixy,
Thank you for responding to my question so rapidly. Let me give you some more info. about my situation. I am an employee with a firm that, between the firm and myself, the contribution can be 15% of my salary (my contribution can be up to 8% of the 15% total). My tax bracket at this time is ,I think 15%, and I would for see my tax bracket at retirment at 28%. Please keep in mind that I'm not to familiar w/ the tax brackets and their impact on me later. As my salary increases, of course my contriution could increase. There are also plans ,keep your fingers crossed, of a possilbe associate position or partnership.

I also understand that my wife can contribute $2k to a Roth I can contribute $2k to a Roth and I can transfer my office SEP-IRA into a Roth. At this point the total amount could be say for numbers sake $8k to a Roth per year. Now I realize that I will have to pay taxes on my SEP-IRA When I transfer It and will not be able to take any Tax-deductions, but isn't this better than the alternative. The alter. being to put $2K in a Roth for my wife and myself (totaling $4k) and maxing out my SEP at work, but leaving it as a traditional IRA ,taking the deduction and saving taxes now, but paying large sums of taxes on the capital gains later.

I'm sure that you needed more info. to answer this question, but for the time being i did the best i could. I would enjoy a dialog with you on this topic before I start transfering funds and investing. Thank you for your interest. Talk to you soon.

I'm sure how to post a mesage to a certain location so I hope you get this.
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Blueman2,

Glad to see you found the right folder. :-)

<<I am an employee with a firm that, between the firm and myself, the contribution can be 15% of my salary (my contribution can be up to 8% of the 15% total). My tax bracket at this time is ,I think 15%, and I would for see my tax bracket at retirment at 28%. Please keep in mind that I'm not to familiar w/ the tax brackets and their impact on me later. As my salary increases, of course my contriution could increase. There are also plans ,keep your fingers crossed, of a possilbe associate position or partnership.

I also understand that my wife can contribute $2k to a Roth I can contribute $2k to a Roth and I can transfer my office SEP-IRA into a Roth. At this point the total amount could be say for numbers sake $8k to a Roth per year. Now I realize that I will have to pay taxes on my SEP-IRA When I transfer It and will not be able to take any Tax-deductions, but isn't this better than the alternative. The alter. being to put $2K in a Roth for my wife and myself (totaling $4k) and maxing out my SEP at work, but leaving it as a traditional IRA ,taking the deduction and saving taxes now, but paying large sums of taxes on the capital gains later. >>

Much depends on how long the money stays within the Roth, how the payment of taxes is handled, and current versus future tax rates. In general, if you can pay the taxes due without touching the rollover money, then (assuming the same tax bracket now and in retirement) the Roth gets the edge when using the same rate of return on all investment options. If your tax bracket falls from 28% to 15%, you're better off in the SEP. If it falls from 31% to 28%, the Roth also tends to win. I'm running a number of scenarios on conversions now which I'll post here in time, like in a week or so. So far, that's what the data shows assuming the opportunity cost for paying taxes from another source is thrown into the mix by adding that to the after-tax results of the deductible investment like a SEP.

In your case, not only do you have to look at those issues, but you have to compare possible rates of return in the SEP options against those in the Roth. It's not an easy question to answer, and the short one is, "You have to run the numbers for yourself."

Regards.....Pixy
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I think you should figure on being at a lower tax rate after retirement. I would use 15% instead of 28%.

Also, I would defer taxes as far into the future as possible. My advice would be to not use the Roth IRA, save the tax you would pay and invest that too in another regular investment account and put in a growth fund such as KAUFX, BARAX, PGHGX or something that will grow at a high rate over time.

Then you will have much more that enough invested in this account to pay taxes on your withdrawls from the regular IRA.

For specifics please see my post "Why Roth IRAs are bad".

If you can control where the SEP-IRA is invested I would also put that into a growth fund and just keep adding to it each month.

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Davidholl,

<<I think you should figure on being at a lower tax rate after retirement. I would use 15% instead of 28%.>>

That's a generality that will get too many folks into trouble. Surprisingly, many folks will stay in the same tax bracket they are in right now (i.e., 28% where most taxpayers are today). It's true many will also drop to the 15% bracket. For them, the traditional IRA will be better. However, I disagree strongly that everyone should plan on being in the 15% bracket, particularly those who did more than rely on Social Security to provide a third or more of their income in retirement. For those, your advice is a disservice. They, in particular, will remain in at least the 28% marginal tax bracket. And for them, the Roth will win out over the traditional IRA.

Regards.....Pixy

Regards.....Pixy
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Davidholl said:

<<I think you should figure on being at a lower tax rate after retirement. I would use 15% instead of 28%.>>

And TMFPixey replied:

>>That's a generality that will get too many folks into trouble.<<<

To which I add: Well said, Pixey! I, for one, plan on retiring to a *higher* tax bracket.... or at the very *least* the same bracket. And that's only if I screw up reeeaaal bad.<g>

orangeblood
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<< That's a generality that will get too many folks into trouble. Surprisingly, many folks will stay in the same tax bracket they are in right now (i.e., 28% where most taxpayers are today). >>

ack........ i have a long long long way to go to reach a tax rate of 28%, where most taxpayers are today??? i can only hope to reach the kind of agi, let alone taxable income. :(

anyway, looked a some quick numbers from the 1997 tax schedules.......... single taxable income of $124,650 will results in a 27% tax rate, $24,650 is the maximum for 15%. for married filing jointly, a income of $151,750 results in a 26% tax rate and $41,200 for 15%. so in both of these cases you would have to drop your income by over $100,000, or over 70% to fall into the 15% tax bracket. you would need a severe lifestyle change to be able to handle this loss of income. not the kind of retirement i would look forward to. a better plan would be to try and remain near the same tax rate. those marginal tax brackets are deceiving.

btw, the smartmoney interactive site has a quick IRA calculator to compare Roth, tax-deductible and nondeductible IRA's. it takes into account investing the tax savings each year for the tax-deductible IRA and taxes those returns annually as income.

http://www.smartmoney.com/smt/consumer/index.cfm?story=199709081

searching for foolishness,
xtraFool
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XtraFool,

<<anyway, looked a some quick numbers from the 1997 tax schedules.......... single taxable income of $124,650 will results in a 27% tax rate, $24,650 is the maximum for 15%. for married filing jointly, a income of $151,750 results in a 26% tax rate and $41,200 for 15%. so in both of these cases you would have to drop your income by over $100,000, or over 70% to fall into the 15% tax bracket. you would need a severe lifestyle change to be able to handle this loss of income. not the kind of retirement i would look forward to. a better plan would be to try and remain near the same tax rate. those marginal tax brackets are deceiving.>>

I don't know what tables you're looking at. The IRS gives the following taxable incomes as the ranges for 1997 marginal rates:

Single Filers:

15% $0 to $24,650
28% $24,650 to $59,750
31% $59,750 to $124,650

Joint Filers:

15% $0 to $41,200
28% $41,200 to $99,600
31% $99,600 to $151,750

I'm not sure where your "27%" and "26%" rates came from, but they're not the marginal rates in efective for 1997 returns.

Regards.....Pixy
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XtraFool wrote:
<<anyway, looked a some quick numbers from the 1997 tax schedules.......... single taxable income of $124,650 will results in a 27% tax rate, $24,650 is the maximum for 15%. for married filing jointly, a income of $151,750 results in a 26% tax rate and $41,200 for 15%. so in both of these cases you would have to drop your income by over $100,000, or over 70% to fall into the 15% tax bracket. you would need a severe lifestyle change to be able to handle this loss of income. not the kind of retirement i would look forward to. a better plan would be to try and remain near the same tax rate. those marginal tax brackets are deceiving.>>

TMFPixy wrote:
[[I don't know what tables you're looking at. The IRS gives the following taxable incomes as the ranges for 1997 marginal rates:

Single Filers: 15% $0 to $24,650, 28% $24,650 to $59,750, 31% $59,750 to $124,650
Joint Filers: 15% $0 to $41,200, 28% $41,200 to $99,600, 31% $99,600 to $151,750]]

he's looking at the same ones you are...

joint filers making exactly $151,750:
41200 * .15 + (99600 - 41200) * .28 + (151750 - 99600) * .31
38698.50
38698.50 / 151750
.2550148270

joint filers making exactly $99,600:
41200 * .15 + (99600 - 41200) * .28
22532.00
22532.00 / 99600
.2262248995

single filers making exactly $124,650:
24650 * .15 + (59750 - 24650) * .28 + (124650 - 59750) * .31
33644.50
33644.50 / 124650
.2699117529

single filers making exactly $59,750:
24650 * .15 + (59750 - 24650) * .28
13525.50
13525.50 / 59750
.2263682008

Tax rates are going to go up not down.

When congress realises throwing away 20% of each year's tax revenues to pay interest on the debt is stupid and if Social Security hasn't been canceled in 20 years, people are going to be *dreaming* of the "good old days" when the normal bracket was only 28%. Think about what tax rates would pay off the national debt in a 30 year period *OR* fund SS in 2020... in the future I expect the "average tax bracket" to be in the low 40% range.

joy,
Kilmarnoch

ps. is there a message folder that talks about long term "stability" of the federal budget? *=)
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Kilmarnoch spaketh:

>>>he's looking at the same ones you are...

joint filers making exactly $151,750:
41200 * .15 + (99600 - 41200) * .28 + (151750 - 99600) * .31
38698.50
38698.50 / 151750
.2550148270..... <and many more numbers>....<<<

OK, now in English, por favor? Just so the non-numerologists like me can understand.<g>

orangeblood
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Orangeblood wrote:
<<OK, now in English, por favor? Just so the non-numerologists like me can understand.<g> >>

sorry about that ... I realised after the post that I should have labeled each row... I was explaining to TMFPixy where XtraFool was coming up with the 26% and 27% tax numbers.

Also my tangent about tax rates in the future was exactly that, a completely seperate tangent... it had nothing to do with any of the numbers I put up. Just me thinking that anyone guessing the tax rates are going to be as low as they are now, 30 years in the future has their head in the sand (like congress).


Hope this makes more sense:

joint filers making exactly $151,750 (top of the 31% bracket), pay $38698.50 in federal tax. which is 25.50148270% of their income. they make $113051.50 after federal income tax.

joint filers making exactly $99,600 (top of the 28% bracket), pay $22532.00 in federal tax. which is 22.62248995% of their income. they make $77068.00 after federal income tax.

single filers making exactly $124,650 (top of the 31% bracket), pay $33644.50 in federal tax. which is 26.99117529% of their income. they make $91005.50 after federal income tax.

single filers making exactly $59,750 (top of the 28% bracket), pay $13525.50 in federal tax. which is 22.63682008% of their income. they make $46224.50 after federal income tax.

now this explained...
41200 * .15 + (99600 - 41200) * .28 + (151750 - 99600) * .31

You pay 15% tax on the first 41200 dollars, then 28% on the next 58400 dollars (99600 - 41200), and then 31% on the next 52150 dollars (151750 - 99600)... etc. The result is you *always* make more money by making more money. ;P ...even if you "fall" into the next tax bracket. some people spend entirely too much time trying to get into a lower tax bracket because they think that they pay 28% or 31% on *ALL* their income. lots of mis-information.


If you factor the taxes incorrectly a single making $59750 would pay $16730 (28%) in federal income tax not the $13525.50 (22.63682008%) he really needs to pay.

Imagine what happens to a single who makes $59800... does he pay 31% of his total income ($18538) or $13541 [24650 * .15 + (59750 - 24650) * .28 + 50 * .31]? The correct answer is $13541, which is only 22.64381270% in tax. =)


The main point of this is that just because you are "in the 28% tax bracket" does *NOT* mean you pay 28% in taxes. being at the very top of the 28% tax bracket you only actually pay 22% in taxes... the lower in the bracket you are the lower the percent of your income you pay to tax, (tax ranges from 15% upto 22% in the "single's 28% bracket", and 22% upto 26% in the "single's 31% bracket", etc...).


Saying that someone pays 36% in tax because they make 200k a year is just plan wrong, they pay much closer to 30% in federal income tax. that 6% difference is *alot* of money ($11,229.50)... ;)


If those numbers still don't make sense I'll try explaining again... I look forward to TMFPixy's posts on Roth vs Traditional IRAs.

Later,
Kilmarnoch
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Kilmarnoch,

Comes the dawn. XtraFool was speaking of effective rates and I was thinking of marginal rates. There is indeed a big difference between the two. The first is based on someone's total tax bill, and the latter is based on the cost of every incremental dollar. Don't take that incremental dollar, and the effective rate declines.

<<Tax rates are going to go up not down.

When congress realises throwing away 20% of each year's tax revenues to pay interest on the debt is stupid and if Social Security hasn't been canceled in 20 years, people are going to be *dreaming* of the "good old days" when the normal bracket was only 28%. Think about what tax rates would pay off the national debt in a 30 year period *OR* fund SS in 2020... in the future I expect the "average tax bracket" to be in the low 40% range.>>

Agreed, but I fear it will come in the form of a flat tax or, worse, some kind of national value added tax or a combination of the two. If that does occur (and I fervently hope it won't), everyone's plans may go down in flames

<<ps. is there a message folder that talks about long term "stability" of the federal budget? *=) >>

Not within TMF.

Regards.....Pixy
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Orangeblood,

<<OK, now in English, por favor? Just so the non-numerologists like me can understand.<g> >>

LOL. Fortunately, Kilmarnoch took care of the answer. I was going to use pig latin just to further confuse you. :-P

Regards......Pixy
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Kilmarnoch,

<<...even if you "fall" into the next tax bracket. some people spend entirely too much time trying to get into a lower tax bracket because they think that they pay 28% or 31% on *ALL* their income. lots of mis-information. ... Saying that someone pays 36% in tax because they make 200k a year is just plan wrong, they pay much closer to 30% in federal income tax. that 6% difference is *alot* of money ($11,229.50)... ;) >>

I agree. Far too much time is spent trying to avoid taxes. True the incremental dollar will be taxed at a marginal rate, but the effective rate won't move up all that much and the net income still increases. I'll avoid taxes where and when I can, but when I can increase my net income, I fully intend to do so.

Regards......Pixy
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>>>Hope this makes more sense:<<<

Much more, thanks! I appreciate that you put everything in perspective, a lot of people could stand to read your post.

orangeblood
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<I think you should figure on being at a lower tax rate after retirement. I would use 15% instead of 28%.>

I think you are being unrealistically pessimistic. If someone starts saving regularly in a 401(k), an IRA, or a Roth IRA, starting at a suitably young age (say 25 to 30) and does this consistently until age 60 to 65, they should achieve a great return. Even if they wait until they are 70 1/2, they must ultimately take the money out. At that point, the amount they take out will quite possibly put them in the 28%, 31%, 36%, or 39.6% incremental tax bracket, depending on how soon they started these plans, how much they were able to invest each year, their fortune in picking the right investments, etc. It is relatively easy, by employing Foolish methods, to run your capital over $2,000,000, and taking about 5% of that out every year can kick you out of your 15% incremental tax bracket.
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There has been some debate over whether people
will have a higher or lower income, hence tax rate in
retirement.

If I predict my (inflation adjusted) income will
be greater in retirement, I will take this as a sign
that I should start spending more money now *.

I want the check to the undertaker to bounce,
while others want to found dynasties. There
is nothing wrong with either approach, but
you should think about your goals and make
your financial plans to bring them about.

* I might "spend" the money on a sabbatical,
money can buy time as well as things.

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Vtaeger,

<<I want the check to the undertaker to bounce,
while others want to found dynasties. There
is nothing wrong with either approach, but
you should think about your goals and make
your financial plans to bring them about.

* I might "spend" the money on a sabbatical,
money can buy time as well as things.>>

How true. That's why Pixy's motto is, "Ya makes your choices and ya lives with the results." No one has a lock on the "right" choice.

Regards....Pixy
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