Mikefbolen wrote:

- quote -

Correction--50 to 85% of your social security benefits will
be *subject* to tax, not taxed at 50 to 85%. To perhaps
help you grasp the difference--right now, assuming you are
paying income tax, 100% of the amount you don't put into an
IRA is treated "just like" that 85%--that is, subject to tax.

Or, to phrase it slightly differently, if the law doesn't
change, you'll pay at least a 15% *lower* rate on your
social security than on other ordinary income.

Now, that said, if you are sure you will end up in the phase
out range for income when you are retired, then the
effective marginal rate on the IRA distribution could be
significantly higher than the technical marginal rate,
because it could increase the tax on your social security.
But you have to realize that if you aren't in the phase out
range (either too much or too little income), it's no longer
relevant.

Be careful here--I think you are in danger of making a
decision based on emotional reactions to taxation and
treatment of social security rather than a rational analysis
of which route gives you the most available funds after
taxes (which should be the real goal).

Your message never even considers the long term value of
compounded growth on the funds that are not going to pay
taxes each year--a function that grows in an exponential
rather than linear fashion. That factor is the major
advantage of all forms of tax deferred investing, but your
analysis ignores it entirely.

Also--if you are eligible for one, a Roth IRA would both
address your concern and give you tax *free* growth. And,
frankly, if your income is such that you aren't eligible for
a Roth I'd suggest that if you do a decent job of saving for
retirement, the *last* thing you'll need to worry about is
the social security phase out, because you'll have enough
investment income at retirement that you'll already be at
the 85% level.

Finally, note that you are presuming Congress doesn't
eventually just make social security taxable and remove the
phase out range entirely, as well as increasing the marginal
tax rates. You have to ask yourself a simple question--what
if I change any of those presumptions?

--
Ed Zollars, CPA
Phoenix, Arizona

On Mon, 15 Sep 2003 07:50:48 CST, "Ed Zollars, CPA"
<ezollar[at]mindspring.com> wrote:



- quote -

This deserves emphasis.
The taxation of Social Security, including other things as well, is
fluid. While I don't know what the Internal Revenue Code will look
like in 10 years, I am fairly confident it will be different from now.
It certainly has changed over the last 10 years!

So regardless of whether you are a long way from retirement or even if
ready retired but plan to live a while, I'd move the focus from taxes
to investment basics. In other words, key on diversity, costs and a
good asset allocation plan (including rebalancing.) My experience is
folks with lots of money don't worry about taxes. <grin

-HW "Skip" Weldon
Columbia, SC

I am self employed and have funded my 2002 Sep Ira for
$39,600 and was going to fund $40,000 for 2003 BUT
I am now having second thoughts. It appears that if your
income is over $3,000 per month your social security benefits
will be taxed at 50 to 85%. My recent statement from social
security indicates that I will receive $1,850.00 per month
plus wifes social security several years later of $900.00.

It seems to me it would be better to pay the tax now
(tax rates maybe even higher at my retirement age in 13
years)on current income and not fund the ira. The money
saved when withdrawn would not be considered income except
for the earned interest thus not could against the social
security. Seems to me the high tax on the social security
benefits make the Ira a bad retirement plan?

What do you think, any advice?

Mike