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Home > I had an OMG moment last night

I had an OMG moment last night

September 16th, 2008 at 09:08 pm

... and I don't have them very often. (oh, btw, it has nothing to do with the stock market insanity either).

Background: In the past two plus years I have been getting myself knowledgeable about everything financial. I read items on the internet, finance mags, newspapers, and while I am not into day trading or other esoteric things, I am trying to build a solid net for retirement in around 20 years. I really thought I knew everything (or had a decent grasp anyway) of all things dealing with personal finance. I have co-workers that ask me questions now, I know so much on the subjects.

That said, I was... well stunned... by what I read last night. I'm a numbers guy, so it takes something major to get my attention. It was in the latest edition of Money magazine (sorry, no links are avaialable yet, Page 122 - Oct. 2008 issue). It basically describes how if you are retired, have a pension or other source of income that will give you say 25K per year, for every extra dollar you "earn" (and money you withdraw from a retirement plan will be taxed as "earn"ings), your effective tax rate can very easily be 46%. And that is based on current rates, it could go higher! I spend years saving money, and then the gov't takes half! OMG! Not if I have anything to say about it.

OK, I'm calm now. Its a money mag, so what do they recommend? One word - "ROTH"! I fortunately have two old 401k's I can move into a Roth account. There is the tax hit involved, but the more I ruminate this, the more I am convinced that the next year or two I will be setting up some major Roth roll-overs.

Seriously, if you are planning on having any moderately decent retirement, you need to read this.

4 Responses to “I had an OMG moment last night”

  1. fern Says:
    1221600730

    I started reading this issue, which i see has a retirement theme. I'm aware of what they say about converting traditional IRAs to Roth IRAs, and in fact i took steps to convert one of my IRAs to a Roth, and the paperwork is waiting for me to do it, but i'm having second thoughts as i'm just not in the mood for a big tax hit this spring.

    Every year for the past 5 years i owed several thousand dollars due to freelance income i didn't report quarterly, only at year's end. I thought this might be the first year in quite a while where i owe nothing cus i dropped most of the freelance. It just didn't seem worth it to bust my butt when the govt took one-third. Sigh. I know i need to do it cus i don't see taxes dropping, on the contrary....

  2. Broken Arrow Says:
    1221607691

    Yikes. 46% of anything is scary. I'm already a Roth fan, but this just adds fuel to the fire.

    Oh, and I think day trading is over-rated anyway. Not due to the markets right now, although that is a bit of a bummer. But mostly based on what I've learned so far.

  3. merch Says:
    1221618669

    Markets are better for day trading now. Higher volatility.

    One word of caution is that taxes change over time so what is true today may not be true in 20 years.

    With that said, my strategy would be to maximize the match of the 401(k) (nothing like free money), then add to a roth, and then go back to your 401(k).

    With that said, after a certain income, you can't contribute to a Roth anymore. Of course working in DC, you might be in that bracket.

    Just something to think about.

  4. Single Guy Says:
    1221659768

    Where I work I have a pension (T minus 3 days for vesting!), so there is no retirement match. The "match" comes in the money my employer puts into the pension (currently ~9%, but it could go higher next year due to market issues!).

    I don't make so much that I can't put into a Roth. I only started with Roth last year, and have put in 2K so far this year.

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