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You mean if the flat tax is in the form of a consumption tax or VAT-style tax?
The flat tax could also be in the form of an income tax, in which case no harm no foul.
I don't think there will ever be a flat income tax. We already have a flat tax (capital gains) and it provides a very good case study of why such taxes simply don't work. One size fits all taxes heavily favor the rich.
I believe you're overthinking it swebb.
The only tax bracket that matters is your marginal tax bracket. To use your example, at the 25% tax rate with the 4K pretax contribution amount:
Roth: 3K goes in and 3K comes out (of principal, obviously)
Traditionial: 4K goes in and 3K comes out.
If tax brackets are the same then distributions are the same. Your investment decisisons should not be affected by your IRA type.
I still think it is more complicated than this. Assume all of my contributions into the Roth are at the 25% tax rate. So for the contribution side the "penalty" for using a Roth is 25% (that I could have deferred if I used a traditional IRA). When it comes time to take my distributions, also assume that my marginal tax rate is 25%. By the way taxes are assessed, I only pay 25% tax on the portion of my income that falls in the 25% tax bracket. Assuming todays tax brackets for "married, filing jointly", that would mean that my first $17,000 would be taxed at 10%, the portion between $17,000 and $69,000 would be taxed at 15%, and the portion above $69,000 would be taxed at 25%. In this way the taxes I pay at the time of distribution is significantly lower than the 25% marginal tax bracket.
As an example, if I made $100,000 I would pay:
0.1 * 17,000 + 0.15 * 52,000 + 0.25 * 31,000 = 17,250 (17.25%)
As someone else pointed out, Social Security income is taxable in some situations, and would have to be figured in to the above.
I think the simplification that most people make is to assume that if you are in the 25% tax bracket then *all* of your income is taxed at that rate, when in reality it is only the marginal income that gets taxed at that rate. That's my understanding, anyway -- and if correct it is an important consideration in making the Roth vs traditional decision. (I'm using both for various reasons)
s
That was probably not a good move. Look at it this way, in your situation your maximum risk was 10% (the penalty for early withdrawal, assuming you took 100% of the money out for that year).
You make a good point, something I probably didn't understand fully when I made my decision. The other mitigating (?) circumstance is that because I now have a 401K plan available at work (new this year), I have an additional $16,500 I can contribute (Roth or traditional), in addition to a SEP 401k that my wife has access to. This puts our total contribution limit into the $30k + range, which is enough "room" to get last years (deferred) contribution in with the same tax advantage, without really affecting how much I can/do contribute this year. I do, of course, lose the year opportunity of my money growing.
So while it still might have been the better choice to put it in last year, I don't think it makes too much of a difference. And, maybe I'm just rationalizing.
-s
I think the simplification that most people make is to assume that if you are in the 25% tax bracket then *all* of your income is taxed at that rate, when in reality it is only the marginal income that gets taxed at that rate.
Yes, I can't believe some people still believe this, but I see this time after time in those articles about taxation. I remember when Obama was running for president, you'd have quotes from "business owners" who claimed they made $250K (in sales, not in profits, so really they didn't) and that all of their income would soon be taxed at 36% or 39.6% because of Obama. These people are too idiotic to be successful business owners.
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I have read a lot of web articles on how to decide between a traditional and a Roth IRA. While there are many complexities, one of the big "rules of thumb" seems to be that if you expect to be in a higher tax bracket when you retire than you are currently, use a Roth, otherwise use a traditional. For example (plucked from a web page):
"Again, if the taxpayer were in the same tax bracket before and after retirement, there would be no benefit or advantage to either IRA."
This is a point I have considered many times, and one I have discussed with "knowledgeable" people, and have never had a satisfactory conclusion. Admittedly, my understanding of tax law is limited, but as I understand it, the marginal tax bracket is most important on the contribution side, and the average tax bracket (if that makes sense) is what matters on the distribution side. By way of example, if an individual can afford a $4000 contribution in pre-tax dollars, and is in the 25% marginal tax bracket, consider the two investment options.
1. Invest $4000 in a traditional IRA, with no taxes deducted.
2. Invest $4000 - $1000 (25%) in a Roth IRA.
When it comes time to take a distribution, assume the person is in the same 25% marginal tax bracket. For the traditional IRA, the first portion of their income (I presume) is taxed at 10% the next portion at 15%, and the rest is taxed at 25%. (this is, of course, assuming tax brackets stay the same). Compared to the Roth IRA which paid 25% tax on all contributions, the traditional IRA paid