Comments (scroll down to add your own):

1. I should emphasize that it’s tax-_deferred_, not tax-_exempt_. Tax deferment just pushes the tax consideration to a later date, when you might be in a lower or higher tax bracket. All too often, these discussions focus on current year tax “savings” with minimal consideration on the future taxes you inevitably have to pay.

   Your tax tables are incomplete, because they don’t show personal exemptions or standard deductions. (These can be significant for a family, not so much for a single person.) While I expect that tax rates will increase in the future, I also expect that there will still be income not taxed at all due to personal exemptions and standard deductions. Therefore it is worthwhile to have the marginal tax on some of your current income deferred until a later date when you won’t have any (retirement).

   On the other hand, since it’s possible that a dollar of realized income (including tax-deferred money) can result in $.50 or $.85 of Social Security being taxed, the effective marginal rate you pay on deferred income can be much higher than your current marginal tax rate, should you have too much. This happens when the combined income from tax deferred income and Social Security exceeds a certain amount, an amount which has never been indexed for inflation and is likely to remain unindexed. For example, should you defer tax from income at a current 25% marginal rate but your marginal tax rate in retirement is 18% and %.85 of Social Security benefits are taxed, your effective marginal rate is 33.3%. No tax savings there. Yes, I know that a marginal tax rate of 18% doesn’t appear in the tables, but I think it likely that today’s 15% bracket will be come 18% and I hope not higher.

   I feel that some of your retirement savings should be in Roth accounts, once you already have some tax-deferred retirement savings. As a general rule, participate in your employer’s 401k plan to get the employer match, then fund a Roth IRA. Personally, with substantial tax-deferred income I’m hoping my employer will offer the new Roth 401K.

   Comment by Mike — Sep 16th 2006 @ 12:10 am

2. I’m getting my employer match through my retirement program at work, we’re maxing our Roth IRAs, and then we’re doing additional tax-deferred retirement saving through an optional 403(b) plan.

   Comment by nickel — Sep 16th 2006 @ 12:23 am

3. I think you have a typo in the ‘Schedule X: Single’ table. The last row, for $336,550 and over, should probably be:

   $97,653.00 plus 35% of the amount over $336,500.

   I haven’t checked any of the other tables, but when I ran this table through Excel to look for either a tax jump or tax drop from one bracket to the next, I noticed there’s a $10,000 drop in tax the minute you reach $336,500, which seemes out of place.

   Comment by Michael A. Litscher — Sep 28th 2006 @ 6:57 pm

4. Thanks for the catch, Michael. Fixed it.

   Comment by nickel — Sep 28th 2006 @ 10:16 pm

5. do 401k regular and 401kRoth require separate federal id# ?

   Comment by ampatel`` — Dec 12th 2006 @ 12:11 am

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