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August 09, 2006


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I am finding, increasingly, a number of my clients who are well...pissed off...because they are shocked at how much they are paying in taxes on all this money they saved in "tax deferred" retirement vehicles.

They assumed that they would be in a lower tax bracket when they retired. Now, many of them are finding themselves in high tax brackets at retirment and when Uncle Sam gets the first 33%, they are shocked, upset, and very frustrated that "no one told me!".

A agree with your comments. I just think it is imperative that people calculate reality at the end. No one does it...the big surpise at the end is devastating to some!

Your life gets turned upside down when you are 65 and have a certain amount of money to retire on and THEN you remember that Uncle Sam has his hand out. It can create a HUGE hole in peoples plan.

David brings up an excellent point, but I believe it is incumbent on advisors and go-it-alone investors to factor the following sink holes in retirement:

1) cost of living changes
2) health costs in later years
3) inflation
4) taxes

Squirreling away funds is a great habit, but a plan which doesn't address the above issues barely qualifies as planning. Some of the above items are hard to estimate and the tax code is certain to change, but I find estimating income low and expenses high is a good way to hedge.

Well, remember, this government's spending priorities will probably mean an increase in taxes for most people in the future.

But that's not what I am here to talk about. There's a marginal question with the 401(k) contributions that needs to be considered. If you have income of say $115K gross annually, you cannot contribute to a Roth. But if you max out your 401(k) to the tune of $14K for the year, your AGI is now $100K for tax purposes. At this level, you can make some other above-the-line deductions to get you below an AGI of $95K. Now you fall under the IRA single earner phaseout AGI level, so you can put $4K into a Roth.

Match or no match, that's a good deal IMO. At the margin.

And how can you not like tax diversification?

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