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If a person could save 25X annual spending entirely in Roth accounts,
would there effective tax bracket be 0% (outside of paying property
taxes and sales taxes)?
Three related questions:
Some (Most) of the 25X would come from a "Roth 401k"- the match on
this would be in a regular 401k. This would get taxed, but might be
low enough in a given year to be under standard deductions? How would
one consider this for tax planning (value of a match vs match
increasing tax during retirement)?
If there are dividends being paid from taxable investment accounts, do
the dividends count as ordinary income, or because of current tax
favorable treatment, do dividends get considered into this
differently?
It makes sense to me to maximise Roth accounts (to try to keep no
money from getting taxed), but if a person "misses" the goal, did they
pay more in taxes (while working) than they needed to? Meaning does
it make sense to sell out, use Roth IRA and Roth 401k in hopes of
paying no taxes in retirement... at risk of paying too much taxes
while working?
jIM wrote:
> If there are dividends being paid from taxable investment accounts, do
> the dividends count as ordinary income, or because of current tax
> favorable treatment, do dividends get considered into this
> differently?
If one is in the 'zero' bracket, 2007, single = $5350 + $3400 = $8750
It doesn't matter where the income comes from. i.e. the STD deduction
and exemption can wipe out dividends if you wish.
> It makes sense to me to maximise Roth accounts (to try to keep no
> money from getting taxed), but if a person "misses" the goal, did they
> pay more in taxes (while working) than they needed to? Meaning does
> it make sense to sell out, use Roth IRA and Roth 401k in hopes of
> paying no taxes in retirement... at risk of paying too much taxes
> while working?
I think that as much as we talk about 'saving your way to the next
bracket' at retirement, you can certainly do the opposite, live in the
28% bracket, and retire at zero. We've discussed the point of
diversifying across tax status to maximize wealth and minimize taxes. As
you suggest, even a Roth 401(k) isn't purely post tax if the company
matches. A $100K earner, 5% match, will have $15500 pre tax, $5000 post.
I think that over weighting in post tax (Roth) retirement accounts is a
missed opportunity, the $8750 above, plus the 10% rate up to $7825. So
for a single person, $16575 has a total tax of $782.
Yes, rates change, past performance, yada, yada. Either extreme on the
tax continuum is lost opportunity.
JOE
On Fri, 1 Jun 2007 13:31:58 -0500, jIM <n...@h...com>
wrote:
>It makes sense to me to maximise Roth accounts (to try to keep no
>money from getting taxed), but if a person "misses" the goal, did they
>pay more in taxes (while working) than they needed to? Meaning does
>it make sense to sell out, use Roth IRA and Roth 401k in hopes of
>paying no taxes in retirement... at risk of paying too much taxes
>while working?
This is a very individual thing. My advise is to not live your life
merely with taxes in mind.
Thumper
Thumper wrote:
> This is a very individual thing. My advice is to not live your life
> merely with taxes in mind.
> Thumper
But, with a bit of research and education, one can make some better,
informed choices. In the end, there's more to gain by saving the right
percentage and investing with an eye toward diversification, I'd agree.
Proper tax structuring can add a 5-15% boost that's not trivial. Why
would you be so quick to dismiss that, when, as a group, we analyze
everything else to death?
JOE
jIM wrote:
> If a person could save 25X annual spending entirely in Roth accounts,
> would there effective tax bracket be 0% (outside of paying property
> taxes and sales taxes)?
>
> It makes sense to me to maximise Roth accounts (to try to keep no
> money from getting taxed), but if a person "misses" the goal, did they
> pay more in taxes (while working) than they needed to? Meaning does
> it make sense to sell out, use Roth IRA and Roth 401k in hopes of
> paying no taxes in retirement... at risk of paying too much taxes
> while working?
>
Just remember that if you plan everything using the current tax laws,
the government can come along and retroactively change the rules on you
15 years from now. That's exactly what happened with the UTMA account
that I set up for DD's college savings. The saving grace is that the
account had very poor returns (therefore little income to be taxed at
high rate) and other accounts have had very good returns. DD can leave
most of that money alone until she's 24, meanwhile I'll pay for much of
her college using other funds as tax efficiently as I can. She can
eventually use the UTMA to pay off her student loans when she gets out
of college and doesn't have much income yet.
Unless they change the rules again.
I fully expect a "flat tax", under the ruse of "fairness", to be
implemented in such a way and just in time to tax my (and other baby
boomers') Roth account withdrawals.
Bob
"joetaxpayer" <j...@n...com> wrote in message
news:L_mdnVAtiqDrD_3bnZ2dnUVZ_v-tnZ2d@comcast.com...
>
> Proper tax structuring can add a 5-15% boost that's not trivial. Why
> would you be so quick to dismiss that, when, as a group, we analyze
> everything else to death?
>
I'm surprised at you, Joe. There are many of us here who advocate not
letting the tax tail wag the dog. jIM may or may not be doing this (we don't
have enough information), but Thumper's response is right on.
Elizabeth Richardson
Elizabeth Richardson wrote on [Fri, 1 Jun 2007 18:06:41 -0500]:
>
> "joetaxpayer" <j...@n...com> wrote in message
> news:L_mdnVAtiqDrD_3bnZ2dnUVZ_v-tnZ2d@comcast.com...
>>
>> Proper tax structuring can add a 5-15% boost that's not trivial. Why
>> would you be so quick to dismiss that, when, as a group, we analyze
>> everything else to death?
>>
>
> I'm surprised at you, Joe. There are many of us here who advocate not
> letting the tax tail wag the dog. jIM may or may not be doing this (we don't
> have enough information), but Thumper's response is right on.
Right on for providing very little information.
There's not letting the tax tail wag the dog and there's ignoring it
completely, which is a waste of good money.
Elizabeth Richardson wrote:
> I'm surprised at you, Joe. There are many of us here who advocate not
> letting the tax tail wag the dog. jIM may or may not be doing this (we don't
> have enough information), but Thumper's response is right on.
>
> Elizabeth Richardson
I'm surprised at you, too. Thumper says "not live your life
merely with taxes in mind." I don't suggest it's the top priority, just
that's it's worth a look. We agree that we don't know what the tax
structure will be in 5 years, let alone 10 or 20. To that, I suggest
that choosing to go to either extreme, all pre-tax 401(k) or all post
tax Roth type accounts, is putting all your eggs in one tax basket. My
initial rambling about the numbers was just pointing out to jIM that a
certain amount of income is nearly free, and likely to continue to be
free (or nearly so) moving forward. This is all after choosing the right
amount to save and diversifying. Are you suggesting it just be ignored?
I don't mean to pick anyone's words apart, but I thought the expression
"tax tail waging the dog" implied choosing wrong investments and
ultimately getting a lower total return, while paying too much attention
to the tax aspect and not enough to the big picture. I treated jIM's
question as first assuming everything else is in order, and jumping
right to the tax status question. Sorry if I misunderstood his intent there.
JOE
"joetaxpayer" <j...@n...com> wrote in message
news:fsadnR2KBvb9Vv3bnZ2dnUVZ_hisnZ2d@comcast.com...
>
>
> I don't mean to pick anyone's words apart, but I thought the expression
> "tax tail waging the dog" implied choosing wrong investments and
> ultimately getting a lower total return, while paying too much attention
> to the tax aspect and not enough to the big picture.
I always thought it meant deciding upon a course of action based on tax
implications regardless of consequences. You might be either lucky or
unlucky in your results. I think we agree that a better approach is that
your first line of decision-making should be choosing the investment,
regardless of tax implications, but not ignoring tax implications either.
You seemed to take an adversarial position (at least it looked that way to
me) to Thumper's statement "to not live your life merely with taxes in
mind." Perhaps I jumped to conclusions (yet again).
Elizabeth Richardson
On Fri, 1 Jun 2007 16:41:43 -0500, joetaxpayer
<j...@n...com> wrote:
>
>
>Thumper wrote:
>
>> This is a very individual thing. My advice is to not live your life
>> merely with taxes in mind.
>> Thumper
>
>But, with a bit of research and education, one can make some better,
>informed choices. In the end, there's more to gain by saving the right
>percentage and investing with an eye toward diversification, I'd agree.
>Proper tax structuring can add a 5-15% boost that's not trivial. Why
>would you be so quick to dismiss that, when, as a group, we analyze
>everything else to death?
>
>JOE
Because I believe that living a happy and productive life can be worth
far more than that 5-15%.. For instance, I can probably save a good
chunk of change burning wood, especially if I do the cutting, but all
that work isn't worth the saving to me.
Thumper
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