Bob Brinker Free Discussion Site 59,820+

Top 869. Dec 26, 2005 11:54 AM

» bbaddict - Re: Re: Asset Allocation: Consider TAXES!

In response to Re: Asset Allocation: Consider TAXES! posted by Kirk:

People that put their money into tax deferred accounts....still come out way behind, after taxes.

I love to see good analysis, but there is more to consider... Let's consider a person who earns $1000 today and wants to invest for retirement. Let's say he/she is in the 25% tax bracket today. Let's say that the investment goes up 500% during the time he holds the investments considered.

1) $1000 goes into his tax-deferred account, but only $750 would go into a taxable account ($1000 - 25%)

2)The tax deferred account is worth $6000 at the end ($1000 + 500%), but the taxable account is only worth $4500 ($750 + 500%). If the person had to pay taxes on capital gain distributions or dividends along the way, the difference is even greater.

Now, if the person is STILL in the 25% tax bracket when they retire, then there is a big difference (25% on tax-deferred account but only 10-15% on taxable). But most people's tax rates go down at retirement. They pay into the account during their peak earning years. It is quite likely that a person in the 25% bracket today will be in the 15% bracket at retirement.

But also consider FICA taxes. If a person can get dollars put into their tax deferred accounts BEFORE FICA TAXES, then the difference is compounded. If you take the money as ordinary income today, you and your employer have to split a bill for 15% up front. In a tax deferred, pre-FICA account (like my SEP-IRA or a 401K) I don't have to pay FICA now, and also don't when I draw the money out later. So, my tax-deferred account gets a bonus of the amount equal to the FICA taxes today, which compounds and comes out tax free.

And, if you are concerned that the deficits will require higher taxes, the bozos in Washington will certainly raise the cap gain and dividend taxes before the marginal rates. Some see the CG and Div rate cuts as "tax cuts for the rich".

-- posted by bbaddict

Top 870. Dec 26, 2005 11:10 PM

» Happy_2 - Re: Re: Re: Asset Allocation: Consider TAXES!

In response to Re: Re: Asset Allocation: Consider TAXES! posted by bbaddict:
FICA is charged based on your earned income and self-employment income before adjustments for SEP-IRA's, or 401K's.

It is true you won't have to pay FICA when you draw out your deferred accounts. This is not earned income.

The one case where I would always take advantage of a deferred income plan, is when the employer is matching your contribution. In general I would say in years where you are in a high bracket do IRA's, 401K's, and SEP's. In years you are in low brackets, do only Roth IRA's.

-- posted by Happy_2

Top 871. Dec 27, 2005 8:48 AM

» allancoleman - Re: Asset Allocation: Consider TAXES!

In response to Re: Re: Re: Asset Allocation: Consider TAXES! posted by Happy_2:

another consideration for your strategy for saving taxes is Roth conversions . the best way to accomplish this is to convert your IRA accounts while your income is low after you've retired and before you come under required minimum distributions at age 70 1/2 .

keep in mind the deadline for conversions is based on the calendar year and not next April 15th for contributory Roth IRAs . for more information on Roths and conversions see : ( http://www.rothira.com ) . keep in mind most studies show it's best to use ' personal ' dollars outside your deferred accounts to pay the taxes on your conversion , however there have been some studies that show it's beneficial to do some Roth conversions AFTER you've started required minimum distributions .

and for whatever it's worth , bob brinker generally isn't in favor of these conversions whenever he's questioned on them . bob feels why pay a tax today when you can put it off .

-- posted by allancoleman

Top 872. Dec 27, 2005 9:05 AM

» bbaddict - Re: Re: Re: Re: Asset Allocation: Consider TAXES!

In response to Re: Re: Re: Asset Allocation: Consider TAXES! posted by Happy_2:

A SEP-IRA is 100% employer paid, and not subject to FICA. A SARSEP is a salary reduction plan (pd by employee), and subject to FICA

A Solo-401k is also 100% employer paid (by a self-employed person), and not subject to FICA

Salary reduction plans, like the simple IRA or employee paid 401k are subject to FICA

Anyway, not to cloud the issue, but retirement plans that are funded pre-FICA are a great deal

-- posted by bbaddict

Top 873. Dec 27, 2005 9:40 AM

» Tweeter - Re: Re: Re: Re: Re: Re: Asset Allocation: Consider TAXES!

Kirk - tax question

I have some private placement stocks in my IRA account. It appears that some of these holdings may go public or be bought out over the next 18 months. Is there any strategy to avoid having the resulting appreciation in value treated as regular income (at the tome of withdrawal) as opposed to the more favorable capital gain tax rate? (I had to use IRA funds at the time of purchase because that's where the money was.)

tweeter

In response to Re: Re: Re: Re: Re: Asset Allocation: Consider TAXES! posted by Kirk:

-- posted by Tweeter

Top 874. Dec 27, 2005 11:20 AM

» Happy_2 - Re: Re: Re: Re: Re: Asset Allocation: Consider TAXES!

In response to Re: Re: Re: Re: Asset Allocation: Consider TAXES! posted by bbaddict:
.

Regarding a SEP for a self employed person. FICA is computed on the Schedule C profit. This profit is computed on Schedule C without deduction for the SEP contributions. A SEP is deducted as an adjustment to income on page one of your 1040, line 32.

-- posted by Happy_2

Top 875. Dec 27, 2005 11:55 AM

» Happy_2 - Re: Re: Re: Re: Re: Asset Allocation: Consider TAXES!

In response to Re: Re: Re: Re: Asset Allocation: Consider TAXES! posted by bbaddict:
Of course one obvious thing to mention is that if a contribution is made by one's employer, than of course it is not subject to FICA. However, it is also not deductible by the employee. The biggest benefit of making a regular IRA contribution is that you can deduct it from your total income.

-- posted by Happy_2

Top 876. Dec 27, 2005 12:29 PM

» Happy_2 - Re: Re: Consider TAXES!

In response to Re: Consider TAXES! posted by Kirk:
That's right. If a contribution is made by the worker it does not lower the FICA liablility. Of course, if a contribution is made by ones employer, than that does not ADD to ones FICA liablility. This would apply to matching contributions made by the employer.

Regarding investing retirement account assets, I would agree interest earning assets for the retirement account, and equities for the personal account. This is especially true with the new favorable tax rates for dividends and capital gains.

By the way, California adds a 1% penalty to early Ira account withdrawals.

Your list of 1. matching contributions to plans, and 2. Do a Roth IRA makes sense.

For myself, the issue is moot, since almost all my income comes from rents, interest, and dividends. None of these are earned income for FICA purposes.

As a practical matter, for my clients who want to do IRA's, SEP's etc. , I say DO IT. The importance of saving far out weighs the minute calculation of tax savings.

-- posted by Happy_2

Top 877. Dec 27, 2005 1:11 PM

» Happy_2 - Re: Re: Consider TAXES!

In response to Re: Consider TAXES! posted by Kirk:

Kirk, it did occur to me that when I did pay myself a salary from my own corporation, I did do a pension fund contribution up to 25% of my salary. This was a defined contribution plan. This money contributed by the corporation did reduce my total income without incurring FICA tax.
That is one reason I did it.

-- posted by Happy_2