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Well, tax deferrals ARE tax breaks--you're taking a break from paying tax. At any rate, tax deferral on 401k contributions is still important for many participants as it lowers their taxable income each year and allows them to contribute more toward retirement than they could with post-tax dollars. IOW, it's an incentive for many to participate, as zman0 mentioned.
But the best reason to invest in a 401k is for the company match, which, if the proposed insane plan comes into being, would be lost forever. A fairly typical 50% employer match on your contributions gives you a 50% return each and every year, PLUS (or minus) whatever return your investments are giving you. The gummint, OTOH, is going to give you an inflation-adjusted 3% per year. And they're going to force it upon you. Which would you rather have?
I won't even get into all the other negatives.
Here's a brilliant idea: How 'bout if, instead of throwing the baby out with the bathwater, we instead concentrate on EDUCATING 401k participants so that those who don't have the tolerance or the timeline for stock market swings realize they can simply allocate most or all of their money to the bond, money market or stable value funds offered by their plan. Hmmm?
Maybe I'm missing something, but wouldn't the big yucko here, aside from negating the tax deferral, is that the Govt would be managing your retirement? I mean, the 401K was created to encourage people to save for retirement and to remove responsibility from companies. Now the Govt wants to take on the responisiblity? And you think your money is gonna be there when you need it? Kinda like SS? I don't see this as a good thing. ANd how will they market it? With scare tactics. "Oh you don't want your 401K on the free market. Look what happened. We'll take care of it"....Yeah....no thanks.
Hammer all 401Ks with taxes now, and use that revenue to support SS.
Cool
I thnik we may see a national sales tax to pay back the money from Bailouts and stimlus cahecks. That way you spend more you pay may more. Also would encourage savings.
But Forest..the idea that they are selling is that when you are contributing tax deferred dollars you are in a higher tax bracket then when you start withdrawing after you retire.
A fairly typical 50% employer match on your contributions gives you a 50% return each and every year...
Mine gives a 243% return. If I contribute $7 for each $100 of income, my company pitches in $17, so $7 becomes $24. Most of my 401K was in Fidelity Select Gold in 2007, which was up 42% for the year. Needless to say the return on my investment was huge. I sold most of it and locked in a big time gain. I'm looking to be about even by year end this year... unless you count the 243% return on my actual contribution dollars. Obviously I have a huge vested (no pun intended) interest in keeping this extremely lucrative retirement investment vehicle the way it is...
Quote:
Originally Posted by LongArm
How 'bout if, instead of throwing the baby out with the bathwater, we instead concentrate on EDUCATING 401k participants so that those who don't have the tolerance or the timeline for stock market swings realize they can simply allocate most or all of their money to the bond, money market or stable value funds offered by their plan.
But Forest..the idea that they are selling is that when you are contributing tax deferred dollars you are in a higher tax bracket then when you start withdrawing after you retire.
In that sense you are getting a good deal.
Okay.
However the idea that a 401[k] is selling is a stack of 'if' statements.
If you do not wish to use a better method of avoiding taxes,
if you are in a high tax bracket now,
it you will be in a lower tax bracket in the future,
if nothing changes between now and then,
if the mutual fund that your 401[k] is loaded with actually grows,
if hell does not freeze in the mean time.
To me the only 'good deal' in a 401[k] is if your employer is matching you.
That is a good deal!
If you want to get an income with no tax liability then invest in Municipal funds.
If you want to lower your taxes, then invest in a tax shelter.
I invest in tax shelters. My gross income is low, usually around $80k. I pay no income taxes. My income is fully sheltered. No money is with-held from my paychecks, and I pay nothing in April. I am exempt from income taxation, because my tax shelters are enough to fully shelter my taxable income.
Now is your 401[k] fully sheltering you?
If you invest in a 401[k], are you still paying income taxes on the rest of your income? why?
Tax shelters are available to you, so why waste time screwing with a 401[k] that still makes you pay taxes?
That money you hope to grow in the 401[k], don't you think that one day, you will be taking it out of the 401[k]? When it comes out, will you finally get sense and become tax-sheltered than? Or will you be paying income taxes then too?
The only benefit of a 401[k] is if your employer is matching your contribution.
But Forest..the idea that they are selling is that when you are contributing tax deferred dollars you are in a higher tax bracket then when you start withdrawing after you retire.
In that sense you are getting a good deal.
I've seen that often mentioned but is there any data to actually support it? Does anyone have references to show this?
More importantly, will it be true going forward? I think it's a huge assumption to assume you will be in a lower tax bracket when retired in 20 or 30 years. For one, it'll simply take more money to live. The house may be paid off (or not) but everything else will be much higher. For another, I don't see tax rates remaining at the current level for much longer. With the shift toward a socialistic approach and the massive accumulated debt, I would guess tax rates will be significantly increasing. In 30 years, that lower tax bracket rate might be higher.
... More importantly, will it be true going forward? I think it's a huge assumption to assume you will be in a lower tax bracket when retired in 20 or 30 years. For one, it'll simply take more money to live. The house may be paid off (or not) but everything else will be much higher. For another, I don't see tax rates remaining at the current level for much longer. With the shift toward a socialistic approach and the massive accumulated debt, I would guess tax rates will be significantly increasing. In 30 years, that lower tax bracket rate might be higher.
If a person can not, or is not willing to gain control of his income taxes today; what makes anyone think that tomorrow they will magically start controlling their taxes.
It takes a few years of budgeting and tax-planning to conform your investment portfolio to being completely tax-free.
If your losing 25% of your income today to taxes, it does not just suddenly happen when your old that taxes go away.
Your children grow up and move away, you lose those deductions.
Focus now on gaining control of your tax situation, and stop losing money to the Fed.
Then this junk about tax deferring, will be, as it is, junk.
Rather than lecturing in generalities, why don't you just give us a specific example of how a person making $80k can pay no income taxes at all?
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