Roth
I’ve been struggling with a financial question lately. As part of our retirement strategy, we have been contributing to a Roth 401(k). In a Roth 401(k) we pay the taxes at our current rate, but the distributions when we enter retirement will be tax free. In a traditional 401(k), the contributions are tax free, but the distributions will be taxed at whatever rate is applicable then. The Roth 401(k) part of our retirement plan is predicated on the assumption that we will be in a higher tax bracket at the time of retirement, and that the dollar will still be worth enough to make it a value compared to a traditional 401(k).
With the AIG fiasco and such, I’ve been struggling with the viability of a Roth 401(k). There isn’t a guarantee that the government won’t change their mind in 20 years and decide to tax the distributions from a Roth 401(k). If they decide to do that, it would mean that we would be taxed for both the contributions and the distributions from the fund. Even though we hope to be in a higher tax bracket when we retire, would it be wiser to leverage more heavily in a traditional 401(k) and the other retirement funds with tax-free contributions?
The frustrating thing is that my consternation is not driven by financial considerations. If it was a pure financial decision, I’m satisfied with our current distribution. My consternation, however, is driven by distrust in government. I have lost faith in the certainty that government won’t change the rules down the road as they are trying to do with AIG.
What are y’all doin’?
The thing is, they could as easily just say, nothing’s tax exempt anymore—you pay taxes before you put it in, you pay taxes when you take it out, and maybe even you pay taxes all along the way; in other words, all retirement accounts are treated the same as any other investment (stocks, mutual funds, money markets, etc).
Posted by hsgbdmama on March 23, 2009 at 2123 hrs
Still doing the Roth 401k for a couple of reasons. Any Congress that takes away the Roth can not hide from it the way they do most spending. 20 years is 20 years, but for now I will take my chances. The other reason is the best method for distribution in retirement is to use the traditional and Roth together to get more income in the lower tax bracket. The ideal situation is to max out the traditional 401k and make annual contributions to the Roth IRA. This is because you get the tax break now and the Roth IRA offers great flexibility in turns of early withdrawals that a 401k does not. I am not allowed to put money into a Roth IRA, so I make a combination of Roth 401k and Traditional 401k. Take it for what it’s worth,
Posted by .(JavaScript must be enabled to view this email address) on March 23, 2009 at 2203 hrs
I am distrusting government
Posted by lithiameister on March 23, 2009 at 2232 hrs
I fully expect the government to confiscate whatever pittance I have remaining upon retirement. They will then place me in a “senior reeducation center”, where I will be left to die with little or no care.
Owen, retirement is going to suck for us.
Posted by Steve on March 24, 2009 at 0411 hrs
O,
Sis #2 is a CFP. You should talk.
Posted by Jed on March 24, 2009 at 0533 hrs
“Government,” in this case, Congress, can change any law any time they can get enough votes. But introducing a bad law does not mean government has done something. Even having such a law pass the House does not mean the government has done something. Remember, the House was created for the purpose of reacting politically and even emotionally to current events.
The Senate was created to slow such stuff down.
With respect to your Roth IRA, nothing has changed since the AIG situation and the preposterous bill to tax the bonuses at 90%. (I disagree with you that the contract should not have been abrogated, but this bill is stupid and dangerous.)
Congress created the Roth IRA. It can change it any time it wants. This was true before AIG and it is true now. But it would be very difficult to get a bill passed that would tax money already in Roths.
I think you are more in danger of losing the value of the money in your IRA due to another banking/Wall Street scandal than you are to lose it to taxation. (Right now, though I am afraid to actually look, the value of my retirement account may less than the principal I have paid in. In that context, 90% sounds like a bargain.)
Anyway, you distrusted government before the AIG situation and you distrust it now. Yet you put money in a Roth anyway. You have to put your money somewhere (though under the mattress doesn’t sound so bad, right now). So nothing has really changed there.
Finally, by putting your money into an IRA or other retirement account, you are putting your faith back into the market. Which, while very scary right now, is the historically smart thing to do; taxed or not.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 0618 hrs
I’m not making any contributions this year. I realized during the market meltdown that much of my savings was tied up in “government restricted” programs such as my 401k, IRA and 529 plans. It never occurred to me that if things get worse, sometime in the future I’d have to access that money. I’d prefer to have some money outside the government control.
The other question is what you invest it in. i think land looks pretty good right now as an inflation hedge while we print trillions on Ben and Timmy’s printing press.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 0751 hrs
This seems a strange worry as government could decide to tax or confiscate anything within its’ reach.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 0857 hrs
Numerous other proposals that have no chance of being passed now might be easily passed in the 30 years between the now and retirement.
What happens if they have a national sales tax and get rid of income tax (or more likely both)? All that money in peoples Roth’s will also be taxed when they spend it. That to me is a far more likely scenario than just applying income tax or capital gains to Roths.
Or if they do a flat tax which is supposed to be simple with a flat rate and no or minimal deductions.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 1027 hrs
The next tax step to reallocate wealth if they continue down this path would be to tax net worth. (i.e. a percentage of your IRA as a tax to government) I think both of your IRAs have the same risk there. For me while I love most of the aspects of the Roth, I’ll take the bird in the hand and avoid the current tax. So I’m maxing out my 401K and none of it is in Roths. Predicting tax rates 20 years out hurts my head. But I do think in retirement you have a lot more options to keep your taxable income down, so you’ll probably be in a lower tax bracket.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 1043 hrs
For the record, it’s a Roth 401k, not a Roth IRA.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 1103 hrs
Owen’s concerns are totally justified. There is tangible precedent. In the 1980s Congress passed a tax “reform” bill that retroactively eliminated certain deductions involving real estate investments. This forced some firms into bankruptcy. An investment of mine went to zero the day the bill was signed into law.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 1112 hrs
This forced some firms into bankruptcy.
And created the environment that resulted in the S&L mess that the RTC was created to resolve.
And bankruptcy/dissolution is the only lasting cure for some of the current bailout recipients.
Sounds like Geitner and Bernanke might be headed in that direction.
Good.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 1231 hrs
I don’t believe it will matter if you feed an IRA, 401K, ROTH 401K or savings, you will be punished.
As one who just went through a similar scenario with 529 plans (EdVest) for my college students, I can tell you that saving everything we could for 18 years in these plans cost us dearly in scholarships, grants and financial aid. 529 savings do have a major impact on FAFSA results and expected family contribution, despite what the “experts” say.
Responsibility will be punished.
Posted by .(JavaScript must be enabled to view this email address) on March 24, 2009 at 2358 hrs
Meh. I figure that ammo and mags might be worth more than currency-based investments in a few years anyways.
Posted by Mike Gallo on March 25, 2009 at 1923 hrs
Total Entries: 20000
Total Comments: 134057
Most Recent Entry: 05/25/2012 06:26 am
Most Recent Comment on: 05/25/2012 02:38 pm
Total Members: 9751
Total Logged in members: 0
Total guests: 100
Total anonymous users: 0
Most Recent Visitor on: 05/25/2012 02:44 pm
The most visitors ever was 538 on 12/01/2007 02:11 pm
Protected and licensed under a Creative Commons License (some rights reserved).