From: btwomey@cbnewsj.cb.att.com (william.tw0mey)
Subject: Re: Question about more generous IRAs.
Organization: AT&T
Distribution: na
Date: Fri, 11 Sep 1992 21:27:59 GMT

In article <BuFHEJ.Cp4@taligent.com> cep@taligent.com (Christophe Pettus) writes:
>In article <1992Sep10.230813.10725@colorado.edu> wouk@alumni.cs.colorado.edu (Arthur Wouk) writes:
>>what makes you think that the tax rate when you withdraw will be less
>>that the tax rate in the years you were avoiding taxes? no
...
>This is true, but you know that income in the account will build
>untaxed.  This advantage exists regardless of the federal income tax
>rate.  ...

The future tax rate is something to keep in mind,
but I do not think that it is something to worry about.

I played with my spreadsheet, SC 6.19.  (very nice, free, get it
from an archive site)

Here is what I found for a 401K (with matching contributions):
                            
IN                          
Contribution                          $1000     $1000
Tax Bite                              28.0%      0.0%
After Taxes                            $720     $1000
Employer match                        66.7%     66.7%
Contribution                          $1200     $1667
After 30 years of growth at  6.0%    $94870   $131764

OUT                         
Years to draw                            10        10
Draw for 10 with growth at 5%        $12286    $17064
Taxed contributions                   30000         0
already taxed per year                 3000         0
is taxable                             9286     17064
new tax bite                          61.0%     61.0%
taxes now paid                         5665     10409

What's left                            6622      6655

So, for any tax rate less than 61% when you withdraw, you
will be ahead.  For different tax rates, and company matching
contributions I have found the following break even points
for tax rates:
at 6% growth
Current tax rate   matched   break even rate
15%                   0%           34%
15%                   2/3          46%
28%                   0%           49%
28%                   2/3          61%
at 9% growth
15%                   0%           47%
15%                   2/3          59%

I assumed that you will be taxed on 1/10 of the non-taxed
contributions when you withdraw for 10 years.
I have include the SC file I used.  Play with it,
I would be interested in finding out if I made any mistakes.

Bill Twomey
--
bt@violin.att.com
Bill's Law on Netnews discussions:
"If a poster's name is in the Subject, its not worth reading."

--
# This data file was generated by the Spreadsheet Calculator.
# You almost certainly shouldn't edit it.

format A 28 0 0
format B 5 0 0
format C 10 0 0
format D 10 0 0
leftstring A1 = "IN"
leftstring A3 = "Contribution"
let C3 = 1000
fmt C3 "$####"
let D3 = 1000
fmt D3 "$####"
leftstring A5 = "Tax Bite"
let C5 = 0.15
fmt C5 "#0.0%"
let D5 = 0
fmt D5 "#0.0%"
leftstring A6 = "After Taxes"
let C6 = C3*(1-C5)
fmt C6 "$####"
let D6 = D3*(1-D5)
fmt D6 "$####"
leftstring A7 = "Employer match"
let C7 = 0.666666666666667
fmt C7 "##.0%"
let D7 = 0.666666666666667
fmt D7 "##.0%"
leftstring A8 = "Contribution"
let C8 = C6*(1+C7)
fmt C8 "$####"
let D8 = D6*(1+D7)
fmt D8 "$####"
leftstring A10 = "After 30 years of growth at"
let B10 = 0.06
fmt B10 "0.0%"
let C10 = @fv(C8,$B10,30)
fmt C10 "$#####"
let D10 = @fv(D8,$B10,30)
fmt D10 "$#####"
leftstring A12 = "OUT"
leftstring A13 = "Years to draw"
let C13 = 10
let D13 = 10
leftstring A14 = "Draw for 10 with growth at 5%"
let C14 = @pmt(C10,0.05,10)
fmt C14 "$#####"
let D14 = @pmt(D10,0.05,10)
fmt D14 "$#####"
leftstring A16 = "Taxed contributions"
let C16 = 30*C3
let D16 = 0
leftstring A17 = "already taxed"
let C17 = C16/C13
let D17 = D16/D13
leftstring A18 = "is taxable"
let C18 = C14-C17
let D18 = D14-D17
leftstring A20 = "new tax bite"
let B20 = 46
let C20 = B20/100
fmt C20 "#0.0%"
let D20 = C20
fmt D20 "#0.0%"
leftstring A21 = "taxes now paid"
let C21 = C20*(C14-C17)
let D21 = D20*D14
leftstring A23 = "What's left"
let C23 = C14-C21
let D23 = D14-D21
goto B0
-- 
bt@violin.att.com

Bill's Law on Netnews discussions:
"If a poster's name is in the Subject, its not worth reading."