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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25223  
Subject: Re: Dems plans for 401k Date: 10/13/2008 5:19 PM
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Actually, this statement is not true. A pretax dollar invested now and then taxed in retirement is mathematically identical to a dollar earned, taxed now, and then tax free in retirement if both earn returns at the same compounded rate and are taxed at the same rate. It is inflation that makes the difference. If you can pay the taxes with inflated dollars you might be ahead but probably not if your account gains more than the rate of inflation.

This is true. However, if you have no other sources of income in retirement, the effective tax rate paid on withdrawal is almost certainly going to be lower than the marginal tax rate today. Even if you do have other sources, chances are good that the effective tax rate paid on your 401(k) withdrawals will be lower than the marginal rate saved when you put it into the account.


I actually think there is merit to the idea being put forward, but it requires a lot of tweaking. My general feeling is that neither our health insurance nor our retirement accounts should be held through our employers.

Clearly, Social Security is going to be a failure at some point; there are ways to delay the day of reckoning, but it is not possible to prevent it unless there is a major (unexpected) demographic change. Since this is a serious problem for those under about 35-40, I would favor something like this (ages might need to be tweaked):

(1) If you are 45+, you stay in the current SSI system. You pay in as you have been (your portion AND the employer portion) and you will collect benefits as the system has in the past;

(2) If you are 25-45, you have your SSI benefits frozen at the current achieved level. Your employer will continue to pay their 6.1% towards SSI, but you will no longer pay into that out of your paycheck. Instead, the 6.1% will go into an account along the lines of the one proposed in this thread.

(3) If you are under 25, you are not a part of the SSI system. The 12.2% of your income that was going towards SSI (your 6.1% and your company's 6.1%) will both be placed into an account along the lines of the one proposed in this thread.

While doing this, I believe the money would HAVE to be placed into reserved accounts and actually funded with real money. I would be against the SSI system of IOUs that end up unfunded.

Companies would be given the right to contribute additional money to the account on your behalf. In return, the company would get a similar tax break to the one they get currently for their 401(k) contributions.

I would then eliminate 401(k) plans entirely. In their place, I would significantly increase the contribution (and deductibility) limits for IRAs. I would basically increase IRA limits to $20K (plus $5K for 50+). You would have a choice of the current Traditional and Roth accounts with everyone being fully eligible for either.

These steps would decrease net investment costs and give more control to the individual. They would also even the playing field.

Just my thoughts anyway...

Acme
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