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I know this is somewhat political but it is also very retirement centric. POTUS is expected to release his tax structure proposal soon and this is one of the ideas that is rumored to be in the proposal. It has good and bad results. One you would loose the pre-tax income reduction allowing taxes to be collected at the time of earning but the withdrawal of the funds in retirement would be federal tax exempt like Roth IRA's are.
Morningstar asks these questions.
Quote:
Three questions:
1) Should this happen?
2) Will this happen?
3) If it does happen, what will be the outcome?
It goes on to answer.
Quote:
Should It?
From the investment perspective, the answer leans toward "No."
I for one think it is a good idea and worthy of investigation. It gives the federal government the current income it needs and allows the employee the future tax exempt income they surely can use.
Nope not my cup of tea.
First, I have a natural rebellion against any thing being mandated.
next, I like my pretax exemption.
lastly, roths can be easily withdrawn after a very short time frame. the object is for long term savings.
One of the concerns that has been expressed about the concept is that their could be a psychological impact on workers that discourages them from saving. The concept of the money going in tax free excites and the balance builds up quicker. Will workers be focused on the down the road benefits or will they see it as a gov't tax grab.
Great for this generation of elected officials not for those down the road who won't have the previously taxed withdrawals to fund government.
Another thought is that much of the money in 401K/403B funds don't get spent even in retirement. That also applies to taxable accounts. Investment wealth isn't evenly distributed and many have money they have no intention of ever having to spend if not for medical needs.
One of the concerns that has been expressed about the concept is that their could be a psychological impact on workers that discourages them from saving. The concept of the money going in tax free excites and the balance builds up quicker. Will workers be focused on the down the road benefits or will they see it as a gov't tax grab.
Great for this generation of elected officials not for those down the road who won't have the previously taxed withdrawals to fund government.
Another thought is that much of the money in 401K/403B funds don't get spent even in retirement. That also applies to taxable accounts. Investment wealth isn't evenly distributed and many have money they have no intention of ever having to spend if not for medical needs.
The psychological effect of 401k's being tax-free and encouraging savings didn't work for me at all. I haven't seen taxes go down over the years and always thought it would be better to take out taxes upfront at the current rate instead at withdrawal time years away with unknown tax rates.
The primary difference is only when taxes are paid. In the long run, it looks like the government collects significantly more in taxes on deferred tax 401K's/403B's/ IRA's etc..
On the other hand, most earners would rather pay taxes later, at a time when they are likely to have more discretionary income -- which is why the majority opt for 401K's rather than Roth IRA's.
The primary difference is only when taxes are paid. In the long run, it looks like the government collects significantly more in taxes on deferred tax 401K's/403B's/ IRA's etc..
On the other hand, most earners would rather pay taxes later, at a time when they are likely to have more discretionary income -- which is why the majority opt for 401K's rather than Roth IRA's.
jghorton you make an interesting argument in your first line which I am not sure holds true. Much of that depends on what that person's income while withdrawing tax deferred money. Also it is intensely hard to get people to turn the switch on to spend the money even in retirement as TuborgP mentions in his post.
On your other hand it is true that a good majority do put more money in 401k plans over Roth and tIRA plans, but I think it is due more to the contribution limits. IRA's are limited to $5,500 annually ($6.500 if you are 50 or older) while in a 401k are limited to over $18k and $24k if you are over 60.
With Americans actually living longer and many of them supplement their SS and other income with work they can contribute to Roth IRA's past 70 and a half while you are not allow to contribute to a tIRA past that age. This doesn't mean you can't convert or combine IRA's. It just means you cannot actually contribute to them from even earned income.
Would this hold true with Roth 401k's? Does all of this mean much if all of a sudden the government decides to renege on the code and start taxing earnings from a Roth account? Do we actually believe that tax rates will sky rocket to 50, 60 or even 70% in the future? Will we be forced into poverty by our own lack of will today? All of these questions are present when putting forth this proposal.
I would vote against that happening even though I don't have any skin in the game because I am already retired and not contributing. The Libertarian in me says that the Government should stop telling us what to do as if we are 6 years old and can't think for ourselves.
While I always opted for funding my Roth rather than a regular IRA it was my choice, not the government's. Many people would not contribute to their 401k if they didn't have the immediate gratification of getting the tax break that year. Even if a Roth 401k might serve them better in the long-run it won't help if they didn't contribute.
I think reducing the number of tax exemptions is beneficial so I would vote yes and it should apply to all retirement plans.
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