Handling pretax versus after tax deferred tax investments

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drbrandt1
Posts: 14
Joined: Fri Nov 21, 2014 5:52 pm

Handling pretax versus after tax deferred tax investments

Post by drbrandt1 »

Prior to retirement, I don't think that there are any modeling differences between pre-tax versus after-tax deferred savings. However, after retirement starts and if you work part time for say $10,000 a year, you would be able to contribute $6500 pre-tax money to your Traditional IRA or the same amount to your Roth IRA. Can these scenarios be modeled in the FRP (to reflect no taxes incurred on the $6500 for Traditional contribution while the Roth contribution would be fully taxable)?

Thanks

Doug

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: Handling pretax versus after tax deferred tax investment

Post by jimr »

That's an interesting one. I think you could model this by creating 2 'Additional Inputs' cash flows for each scenario.

The first cash flow would be a 'Savings' cash flow for the contribution of $6500, either to Tax Deferred Savings or Tax Free Savings, depending on whether it's the traditional or Roth IRA scenario. The second cash flow for each scenario would be a 'Misc Income' cash flow to represent the net free income from the part time job, after taxes and the IRA contribution are deducted.

Here's an example of how that second cash flow might be computed in each scenario, assuming part time income of $10k and a 15% income tax bracket. For the Traditional IRA case, the Misc Income cash flow would be $10,000 gross income - $6500 for the IRA contribution - [$3500*.15] for taxes = $2975. For the Roth case the Misc Income cash flow would be $10,000 - $6500 - [$10k*.15] = $2000.

So for the Traditional IRA Case, the cash flows would be as follows:
1) Type=Tax Deferred Savings
Start age=60, End age 65 (or whatever ages)
Amount $6,500, COLA Inflation
Memo - Trad IRA - Contribution
2) Type=Misc Income
Start age 60, end age 65
Amount $2975, Taxable Percent 0, COLA Inflation
Memo - Trad IRA - Net cash after contribution and taxes

For the Roth Case, they'd look like this:
1) Type=Tax Free Savings
Start age=60, End age 65
Amount $6,500, COLA Inflation
Memo - ROTH IRA case - Contribution
2) Type=Misc Income
Start age 60, end age 65
Amount $2,000, Taxable Percent 0, COLA Inflation
Memo - ROTH IRA - Net cash after contribution and taxes

Jim

drbrandt1
Posts: 14
Joined: Fri Nov 21, 2014 5:52 pm

Re: Handling pretax versus after tax deferred tax investment

Post by drbrandt1 »

Nice. Thanks!

Doug

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