Quote:
Originally Posted by jIM_Ohio
Keep in mind the 15% bracket threshold goes up every year. A person needs to consider (as part of a tax plan) if their goal is to stay in the 15% tax bracket or see themselves in a higher bracket based on the circumstances you suggested (losing deductions).
Also keep in mind there is a standard exemption which is used more often than itemizing, and that 75% of the US tax payers pay only tax into 15% tax bracket.
Meaning the itemized techniques are not the only way to stay in the 15% bracket. If passive income comes from dividends or long term gains, this income does not raise taxable income (it is added in on another line).
I think about it this way- My fixed expenses are well within 15% tax bracket. Many of my wants and desires are what put me in 25% bracket territory. And in reality our gross income is approaching 28% which is more likely for us than being in 15%. But if I know in retirement my fixed expenses will be in 15% bracket, the fun stuff could be paid for from other (non income) sources like dividends and capital gains, allowing more money to work for me, instead of paying the same in taxes.
$A in a Roth is > $A in a dividend fund =$A in growth fund> $A in a 401k.
The balance sheet says $A in all 4 cases. But the spending power of the Roth and taxable accounts is much higher (because of taxes).
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Jim, dividend and LT capital gains are only a factor for taxable holdings (non-IRA). I suspect most people at low end of 25% bracket do not hold the majority of their monies in taxable holdings, so expecting a large portion of retirement income to come from them is not realistic. As you know, LT capital gains & dividends within traditional IRAs & 401ks are taxed like ordinary income when withdrawn.
In an ideal world, everyone would split monies between pre-tax, Roth, and taxable to get maximum flexibility.