<p>“What’s the obsession with wealth distribution? I mean really rich people will have all sorts of scheme to evade tax. This proposals only target the less than $10 million crowds.”</p>
<p>They want to get at the money,@DrGoogle, but they don’t want to irritate the big donors, extremely wealthy people. The politicians are bought and paid for, but not by the less than $10 million dollar crowd.</p>
<p>@busdriver11- the reason that they want to get money out of Roth accounts as soon as possible (such as requiring distributions or having a spouse remove all funds within 5 years of inheritance) is so they tax all future earnings.</p>
<p>@dstark - I don’t have any info for you on when to stop doing a tax deferred IRA. Maybe the Bogleheads crowd?</p>
<p>BTW, I think that aarp article is full of errors (but what do I know?).</p>
<p>Dadinator, I thought you had a CFA? :)</p>
<p>Ok. Thanks. Maybe I will poke my head into Bogleheads. I guess I can do it myself, but that takes work. :)</p>
<p>The AARP link may have errors. Nothing is passing right now anyway. :)</p>
<p>I do have a CFA. Usually I am dealing with larger sums of money and not individual’s money, though.</p>
<p>That is really cool.</p>
<p>
</p>
<p>I see this is particularly bad if you have a high enough income that even the original IRA distributions are taxed. In this case you pay tax at a high rate on the principal, say 33%+, and then when it comes time to take distributions, you don’t have the benefit of the lower capital gain rates that a non-retirement account would have enjoyed for most (say 15%). Nobody knows what the future rates will be, but I assume a family that is wealthy enough to be ineligible for IRA deductions probably will have enough post retirement income, say over $75K, that will put it at a significantly higher marginal rate than the long term capital gain rates. </p>
<p>Yeah, but you raised a really interesting point about when to give up the tax deductibility of a traditional IRA or particularly a 401k and the tax deferral on the gains in the tax deferred vehicle for the capital gains treatment of investments outside a tax deferral vehicle (and, BTW, it wasn’t so cool in September 2008 and for the months that followed- it aged me 10 years!).</p>
<p>I would really, really like to stop funding our 401Ks. But it is the only tax break left, so we’re looking at the immediate tax break instead of actually planning things out to be smart in the future. I suppose a reasonable thing to consider is what would one do with the money instead? In our case, we’d pay off our highest interest rate loan (4 % HELOC). If that’s all there was t look at, it would be easy, but there’s so many variables. What will rates be in the future, what your return will be. Who actually knows? If anyone finds some sort of formula or reasonable guidance on this, I’d appreciate it if you’d post it. </p>
<p>This isn’t the answer that you are looking for, but the question that you are asking should really be part of an overall investment strategy. Everyone’s situation and circumstances are different. A strategy has to take into account many factors related to that particular situation, such as risk tolerance, current income needs, time horizon, liquidity constraints, tax concerns, legal issues, and any unique circumstances.</p>
<p>I know…that doesn’t help. You might want to consider meeting with a professional.</p>
<p>Yes… In my mind, whether to fund a traditional ira or not is an issue. I havent done the calculations to confirm this. </p>
<p>I have a friend who is never going to touch his portfolio. So the incentive to use an ira is maybe non-existent for him. </p>
<p>Others may want to use some of their retirement funds when they are alive. Makes things more complicated.</p>
<p>Dadof3 makes me continue to think funding these retirement vehicles
Is not a no brainer.</p>
<p>Yeah… The capital gains may be fleeting if you dont take them. If there are no gains it doesn’t really matter that much. 50 percent tax on zero is zero. :)</p>
<p>Dadinator, I hope you have aged less the last couple of years so you are age appropriate now. :)</p>
<p>They only match up to $500, so we’d always fund that, @dadinator. Otherwise, they contribute 7% of income into our 401Ks, but that is whether we contribute or not.</p>
<p>If the employer contributes 7 percent of your income to a 401k, why would you turn that down? </p>
<p>Are you saying you can just take that money as income today in a paycheck instead?</p>
<p>For regular IRA, you have play around with the Turbo Tax, I’m pretty sure I will pay just enough, but no more than 15%. I won’t pay a lot of tax when I retire. But right now everything is in theory, I need to see one retirement year cycle first to see how much tax I will pay.</p>
<p>“If the employer contributes 7 percent of your income to a 401k, why would you turn that down?
Are you saying you can just take that money as income today in a paycheck instead?”</p>
<p>I would never turn that down. I don’t even think we have that option, because that would be crazy. I’m just trying to figure out when WE should stop personal contributions to the 401K, not the company.</p>
<p>" I know…that doesn’t help. You might want to consider meeting with a professional."</p>
<p>Yes, we probably should meet with someone @dadinator. I’d have to find someone that I really trust, otherwise I know we’d end up with some guy that recommends weird tax shelters…that he’d churn in order to get commissions. We have a pretty good accountant, who might be worth talking to. Of course, nobody really knows the correct answers to all those questions, so any plan would be merely a guess. Better an educated guess than a shot in the dark, though.</p>
<p>The choices of funding a traditional ira or paying cap gains taxes are choices that are good and good. Deferring taxes or paying lower rates are good choices.</p>
<p>If your income is going to be lower or similar in retirement, the odds are your taxes are going to be lower in retirement. Brackets are adjusted for inflation now.</p>
<p>Even if rates rise, the odds are very high that tax brackets are going to be adjusted by inflation. </p>
<p>If you look at the inheritance tax for example, the rates were increased to 40 percent from 35 percent. However, the $5 million exemption is now indexed. The $5 million number is already obsolete. In less than 24 years, the exempion is going to be $10 million if inflation is 3 percent a year. </p>
<p>Things can change but…</p>
<p>My point is this. Rates are only one factor. Rates can go up and your taxes can go down.</p>
<p>Let’s say your estate is $10 million in 24 years. Would you rather pay 35% of $5 million or 40% of nothing?</p>
<p>For many people their inheritance taxes were cut with the rate increase because of indexing the exemption. </p>
<p>I expect the same with income taxes.</p>
<p>(The exemptions, if there isnt a change, are higher for married couples. There are also gift tax exemptions).</p>
<p>Don’t just fixate on rates.</p>
<p>Definitely some things I hadn’t considered, @dstark. I am very fixated on rates. I figure that initially our income will be cut in half, but when we have to take RMD’s, it will increase. I just assume that tax rates will go way up, but hadn’t really considered inflation much.</p>
<p>And here are minimum withdrawal rates right now…</p>
<p><a href=“http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf”>http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf</a></p>
<p>I think this thread is getting a bit hijacked. The OP is a young person seeking advice on investing in a Roth IRA. I think the OP could benefit most from suggestions on investments and savings. He/she will benefit significantly from investing in any IRA and I fear that this level of analysis might create some confusion and then inertia. This is the OP’s first contribution and he/she should be encouraged to move forward. The OP can choose one thing this year and a different thing next year. Getting in the game is critical.</p>
<p>Perhaps a separate thread can be created to address the more nuanced components of retirement savings and investments as they pertain more to the older community.</p>