One of the first essential items of “pre-retirement” planning is to discover your effective tax bracket in retirement. Tax management is a significant strategy to create increased cash flow without market risk. It’s impossible to appreciate the tax equivalent return of any investment until you know your effective tax bracket. And you can’t measure the economic impact of ERISA retirement plans without this knowledge either. The U.S. tax code is a marginal, “progressive” income tax system. As your income increases or “progresses” from one tax bracket to the next you pay a blended tax rate of each tier, after all your tax deductions and exemptions (providing they’re not phased out) as well as any tax credits to reduce taxes owed. Once you know your effective tax bracket you can determine the value of a financial product, especially tax favored financial products and ERISA retirement plans. A Roth IRA is an alternative to tax deductible defined benefit and defined contribution plans. Roth IRAs can’t be deducted, but their proceeds are tax-free during conventional retirement years. So, is the tax deduction worth your participation in a 401(k) strictly on the tax savings? (You do want to participate in a 401(k) if the   Read more…