Talk:401(k) IRA matrix

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Contents 1 Traditional IRA taxed at EFFECTIVE tax rate, NOT MARGINAL 2 Typical Middle Class Comparison 3 Please sort out this contradiction 4 IRA: Roth vs. Conventional 5 Traditional 401k Beneficiary Information 6 Advice 7 IRA: Roth vs. Traditional

[edit] Traditional IRA taxed at EFFECTIVE tax rate, NOT MARGINAL

The article states "This will grow to $43,338.82 in 25 years using the same assumptions and calculations above. The tax on this amount will be 25% * 43,338.82 = $10,834.71, leaving 43,338.82 - 10,834.71 = $32,504.12 from the IRA account"

25%!?? This would not be correct. When the person went to pay taxes on it for their yearly withdrawal, it would not be at 25%. First, standard deduction and exemptions would apply, which would be close to $8750 for a single person (2007), and double that for a married couple. Then $7825 of the remaining amount, $15650 for a married couple filing jointly, would only be taxed at 10%, and from $7,826-31,850 for a single person, and $15,651-63,700 for married couple filing jointly, would be taxed at 15%. Based on this, a $43,338.82 IRA withrawal for a single person in 2007 would be taxed by these calculations: (used tax calculator at http://www.dinkytown.net/java/TaxMargin.html)

IRA gross withdrawal $43,338.82 Standard deduction $5350 Personal exemption $3400 Total taxes $5071 Effective tax rate 11.7% (only the gross adjusted taxable income in excess of $31,850 is taxed at 25%.) If there were other deductions or tax credits not shown here, the effective tax would be even less, making it a far superior choice to the Roth IRA in this situation.

Every recommendation I've seen of Roth IRAs over traditional IRAs makes the assumption that when someone withdraws from a traditional IRA that they will be paying the marginal tax rate on the entire withdrawal without factoring in deductions, exemptions, or the lower tax brackets that are paid into before even reaching the marginal tax rate. It's not just a matter of whether the marginal tax rate is higher at retirement than while contributing as is often stated as the primary determining factor. It's the effective tax rate that really matters. When factoring these elements into the calculations, the traditional IRA is the much better investment in this example contrary to the previously posted calculations which didnt take those important realities into consideration. 69.44.28.121 (talk) 03:10, 23 March 2008 (UTC)Harley

[edit] Typical Middle Class Comparison

The the example shown in the article makes a comparison of the maximum allowed contribution, comparing $4000 put into a Roth IRA vs $4000 into a traditional IRA along with a taxable account. The typical middle class single income earner making $40,000/yr who can afford to contribute 6% of his income to a traditional IRA would be able to contribute only $2400/yr, which is less than the maximum allowed. If the tax payer chose a Roth IRA, after taxes, only $1800/yr would actually go into the Roth IRA. Assuming identical investment growth percentage, the Roth IRA growth would amount to a total which is 25% less than the traditional IRA growth. The first year of retirement, a withdrawal of $40,000 from a traditional IRA would be taxed as ordinary income. Using 2007 tax tables, the standard deduction $5350 would apply, the personal exemption of $3400 would then be subtracted, tax would be applied to the 10% and 15% tax brackets, and only the remaining taxable income in excess of $31,850 would be taxed at 25%. Factoring in the deduction, exemption, and 3 relevant tax brackets, the effective tax is 10.74% on this withdrawal. In this typical middle class example, this is a better option than the Roth IRA where the amount is already 25% less than the standard IRA amount. The traditional IRA would allow the tax payer to withdraw for more years due to the higher growth amount and lower effective tax rate. I could have used a married couple and an $80,0000/yr figure in this example showing the same 10.74% "effective" tax of a traditional IRA, making it a best choice than then Roth IRA, which already has 25% less growth. Financial advisers often advise going with Roth IRAs based on the marginal tax rates expected to be higher at retirement versus the contribution years, but that totally misses the reality of deductions and the tax rate structure used to calculate taxes when making withdrawals during retirement, which results in a much lower effective tax rate than marginal tax rate at retirement for the middle class.69.44.28.121 (talk) 04:21, 23 March 2008 (UTC)Harley

[edit] Please sort out this contradiction

Anonny provided a "technical explanation" for the "Roth-might-still-be-better" information.

Anonny, by "assuming you can't defer taxes on, and [will] pay taxes each year on the growth" inside a Traditional IRA, contradicts the "Inside The Account" line of the table which states that for Traditional IRA "Capital gains, dividends, and interest within account incur no tax liability", presumably until you take those earnings out.

' Be cool if Anonny could speak for himself but would someone straighten this out? Thanks 68.124.67.180 04:21, 15 June 2007 (UTC)

You are correct. Money in an IRA or 401K will grow tax-deferred. Only withdrawals are taxed, and they are taxed as ordinary income, meaning that standard deductions, exemptions, and other tax deductions and credits apply, and total tax is paid at the EFFECTIVE/AVERAGE tax rate, not at the MARGINAL tax rate. After deductions, large chunks of this income are applied to the 10% and 15% tax brackets, and only gross adjusted taxable income in excess of $31,850 is taxed at 25%. For example, for 2007 tax year, using this calculator, http://www.dinkytown.net/java/TaxMargin.html , a single person withdrawing $43,000 from his standard IRA, with no other income, is in the 25% marginal tax bracket, but pays an effective tax of 11.6% ($5,071.) This effectively makes a lot of the Roth IRA advice often given by supposed financial experts bad advice because they don't factor these realities in.69.44.28.121 (talk) 03:23, 23 March 2008 (UTC)Harley

[edit] IRA: Roth vs. Conventional

I'm pretty sure there were some mistakes in the calculations before, so I fixed the calculations and tried to improve the explanation. I included detailed calculations so that others could double-check my work. Sorry I don't know how to make the calculations look prettier.... --RobertC 20:51, 24 July 2007 (UTC)

You made the mistake of not accounting for the annual tax on the portion of the investment held in a taxable account. While the original poster was mistaken to tax the entire amount of growth there, you forgot to consider that it's extremely unlikely that NO tax will be due each year. Interest and dividends are taxable portion of that growth, so, the taxable account is indeed growth-disadvantaged. The reason I say it's extremely unlikely that NO tax will be due each year is that the chance of choosing investments that yield NO interest or dividends while simultaneously matching the growth rate you postulate seems remote. This concern can be optimized and mitigated (tax-efficient mutual funds, for example) but not eliminated. For more detail, see my comments "Traditional IRA taxed at EFFECTIVE tax rate, NOT MARGINAL" and "Typical Middle Class Comparison" on this comments page.69.44.28.121 (talk) 03:10, 23 March 2008 (UTC)Harley

[edit] Traditional 401k Beneficiary Information

I have updated the information regarding assigning a beneficiary. LEX LETHAL 17:35, 16 September 2007 (UTC)

[edit] Advice

Wikipedia is not a how-to or original research; the article should not be giving advice. It should solely present the facts and refer to outside opinions, not our own. Superm401 - Talk 08:55, 30 December 2007 (UTC)

[edit] IRA: Roth vs. Traditional

Looking for comments on the following: The comparison of T vs R IRAs assumes both funds are in identical investments. Claim: the value of this assumption is limited. Rationale: it would make more sense to place R-IRA funds in high risk high yields investments and T-IRA funds in low risk low yield investments, with T:R ratio balanced so that the net risk is suited to the investor.

Personally, I find the article to be woefully inadequate in this department. It does not take into account the effect of buy-and-hold vs. trading strategies. Since sale at a profit generally triggers a tax liability (in a taxable account), it is very hard to compare unless you know exactly what the investment will be...and how it will perform! Isaacsf (talk) 01:55, 29 February 2008 (UTC)