are traditional IRAs and 401k/403k plans the future financial disasters?

[brucec039]

Re: are traditional IRAs and 401k/403k plans the future financial disasters?

Actually one thing I think is to be expected is that a money starved Federal government will look at ALL retirement funds as a source of quick money. It would be a relatively easy sell to the masses to just rob the "rich" who have a million or so squirrelled away for retirement.

It just seems to me that if they already tax the money coming out of 401k's and traditional IRAs, then it'd be tougher to add a tax to that than to just declare money coming out of Roth IRA's now taxable due to the "emergency". All this would likely be subject to some means test so that only a minority of voters would be shafted, same as always.

[zoog]

Re: are traditional IRAs and 401k/403k plans the future financial disasters?

Is it generally considered for some reason I'm unaware of that at retirement time when withdrawn the funds will always be taxed at a higher rate than today? I'm sure at least some people retire on less than they make now, not more.

In our example, we are in the 25% marginal bracket, so the money that goes into 401k and IRAs saves us that much off our tax bill.

But we intend on retiring somewhat early, having our home paid for, brand new cars purchased right before retirement, and our lifestyle now (two homes in two states for business needs) requires so much more than we can certainly live on a much lower income than today. (Going from one large and one small home to one small one in a rural area) We would need to withdraw so little to live on each year that our marginal income tax rate then would be (if not raised) just 15%. Wouldn't that be better for us than a Roth or no tax-deferred account at all? (I am able to buy gold ETF's and non-dollar denominated bond funds through the IRA)

All this math....makes Mongo's head hurt!

The traditional advice and expectation has been as you describe. When you retire you downsize, you don't have to buy work clothes and daily transport there and back, etc. etc. so you may be able to live on less annual income out of your nest egg and therefore have a lower tax rate.

However, a growing number of people expect that our tax rates will have to increase in the future in order to even pick away at our enormous national debt. It's not so much that the year after you retire your tax rate would go up considerably from the last year you were employed, but that if retirement is still some years off from the present day, your tax rates (whether still working or retired) may be higher than they are today. In this scenario, paying taxes today on money going into a Roth IRA and then not paying taxes as you pull the money out might work out to advantage.

[brucec039]

Re: are traditional IRAs and 401k/403k plans the future financial disasters?

The traditional advice and expectation has been as you describe. When you retire you downsize, you don't have to buy work clothes and daily transport there and back, etc. etc. so you may be able to live on less annual income out of your nest egg and therefore have a lower tax rate.

However, a growing number of people expect that our tax rates will have to increase in the future in order to even pick away at our enormous national debt. It's not so much that the year after you retire your tax rate would go up considerably from the last year you were employed, but that if retirement is still some years off from the present day, your tax rates (whether still working or retired) may be higher than they are today. In this scenario, paying taxes today on money going into a Roth IRA and then not paying taxes as you pull the money out might work out to advantage.

Excellent point. I think tax rates will rise. Actually, I wonder if they will rise too far, then shut down the economy and actually lower revenues, then lower again as we again realize that at some point lower rates probably do increase revenues by their stimulative economic effect. Now to guess which way it will actually go.

This all is why my retirement home will be a 2br cabin on 2 acres in the mountains with a nice selection of rifles. Crazy world we're headed towards.

[Andreuccio]

Re: are traditional IRAs and 401k/403k plans the future financial disasters?

Actually one thing I think is to be expected is that a money starved Federal government will look at ALL retirement funds as a source of quick money. It would be a relatively easy sell to the masses to just rob the "rich" who have a million or so squirrelled away for retirement.

It just seems to me that if they already tax the money coming out of 401k's and traditional IRAs, then it'd be tougher to add a tax to that than to just declare money coming out of Roth IRA's now taxable due to the "emergency". All this would likely be subject to some means test so that only a minority of voters would be shafted, same as always.

I disagree. As I understand it, 401k's and traditional IRAs are taxed as ordinary income upon withdrawal. Adding a tax to that means changing the tax rate overall, which is not unexpected from time to time. Roths, on the other hand, come with the promise that they'll be tax free upon withdrawal, since the money was already taxed before it was put into the IRA. Anybody who has a ROTH will scream bloody murder if they are then taxed.

[Andreuccio]

Re: are traditional IRAs and 401k/403k plans the future financial disasters?

The traditional advice and expectation has been as you describe. When you retire you downsize, you don't have to buy work clothes and daily transport there and back, etc. etc. so you may be able to live on less annual income out of your nest egg and therefore have a lower tax rate.

However, a growing number of people expect that our tax rates will have to increase in the future in order to even pick away at our enormous national debt. It's not so much that the year after you retire your tax rate would go up considerably from the last year you were employed, but that if retirement is still some years off from the present day, your tax rates (whether still working or retired) may be higher than they are today. In this scenario, paying taxes today on money going into a Roth IRA and then not paying taxes as you pull the money out might work out to advantage.

Another issue to consider is inflation. Even if you downsize, with inflation you might remain in the higher bracket or even go into a still higher one.

[c1ue]

Re: are traditional IRAs and 401k/403k plans the future financial disasters?

Excellent point. I think tax rates will rise. Actually, I wonder if they will rise too far, then shut down the economy and actually lower revenues, then lower again as we again realize that at some point lower rates probably do increase revenues by their stimulative economic effect.

Taxes will go up. Not just income, but real estate, sales taxes, etc.

State, local, and federal government all have had tremendous growth and have been deficit spending.

Revenues are dropping and will continue to do so.

Borrowing has been common in the recent past to make up for the shortfall, but between the dollar falling/inflation rising and general credit distrust, it is almost assured that the appetite for these bonds is going to decrease.