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Hedging Your Bets on the Tax Cut

By David Wyss

RETIREMENT PLANS. IRA and 401(k) plans should still be fully funded. The lower capital-gains rate reduces, but doesn't eliminate, the advantage of tax-deferred income plans. If an investor has $5,000 in pre-tax income to invest and is 10 years from retirement, a traditional IRA or 401(k) is still the best alternative. If we assume a conservative 8% return, the $5,000 will grow to $10,800 at retirement in 2013. Afterwards, the retiree can withdraw $800 per year ($512 after taxes) without going into principal, still leaving $10,800 ten years later.

On the other hand, because the initial $5,000 contribution is not tax-deductible in a Roth IRA, an investor in the top bracket would invest only $3,

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