I've been thinking about these retirement "benefits" for some time, thought I'd throw out a few comments:

1. It's interesting how the gov't likes us to think of these things as benefits. Wouldn't it be nice if they just slashed the income tax rates significantly, eliminated cap gains, and just let people invest on their own without all the strings attached? Dream world, I know.

2. Sure, with a 401K, you get tax-free investments and usually employer matching, but it seems to me that this could all be wiped out if the tax rates are high when you retire. 401Ks and IRAs are sort of a captive pool of money (i.e. easily controlled), and politicians may have a hard time keeping their hands off as these assets continue to swell. I can certainly see a day when people who have significant 401K or IRA assets will be "means tested" right out of SS benefits (in other words, they paid 50 years of fica taxes for nothing). And, I can see a day when people who've Foolishly saved lots of money will see their 401K/IRA retirement monies taxed to "save" social security (again).

3. 401Ks make it a real pain to keep your asset allocations straight if you also invest individually. Usually, the selection of funds is also limited and includes mostly underperformers.

In sum, I'm not saying that people shouldn't contribute to these plans, but I wish they weren't seen as a "good deal." They're probably a better deal than the same tax code without them, but they certainly aren't ideal, and it's not really a "gift" that politicians let us keep the earnings from our savings. I personally contribute only to the matching limit, and no more. I invest the rest individually.

Just some quick thoughts...

Greetings, Stipple, and welcome.

<<I've been thinking about these retirement "benefits" for some time, thought I'd throw out a few comments:

1. It's interesting how the gov't likes us to think of these things as benefits. Wouldn't it be nice if they just slashed the income tax rates significantly, eliminated cap gains, and just let people invest on their own without all the strings attached? Dream world, I know.

2. Sure, with a 401K, you get tax-free investments and usually employer matching, but it seems to me that this could all be wiped out if the tax rates are high when you retire. 401Ks and IRAs are sort of a captive pool of money (i.e. easily controlled), and politicians may have a hard time keeping their hands off as these assets continue to swell. I can certainly see a day when people who have significant 401K or IRA assets will be "means tested" right out of SS benefits (in other words, they paid 50 years of fica taxes for nothing). And, I can see a day when people who've Foolishly saved lots of money will see their 401K/IRA retirement monies taxed to "save" social security (again).

3. 401Ks make it a real pain to keep your asset allocations straight if you also invest individually. Usually, the selection of funds is also limited and includes mostly underperformers.

In sum, I'm not saying that people shouldn't contribute to these plans, but I wish they weren't seen as a "good deal." They're probably a better deal than the same tax code without them, but they certainly aren't ideal, and it's not really a "gift" that politicians let us keep the earnings from our savings. I personally contribute only to the matching limit, and no more. I invest the rest individually.>>

Good thoughts with some valid points.

I've said it before, and I'll say it again. The Congress giveth and the Congress taketh away. And when they take, they may or may not be fair. It all depends on the mood of the country and the issue of the day. All any of us can do is take the hand that's dealt and play it out as best we can. We may win and we may lose, but one thing's for sure -- We can't quit the game. And my mama never promised me a rose garden, so I'm just gonna keep weeding the tulip patch as best I can.

Regards.....Pixy

I am seriously considering rolling a traditional into a Roth because, all else being equal, whatever that means, it will be advantageous to my situation. One of problems is that the govt likes to change the rules of the game in later innings. This is the wildcard that gives me pause as to what to do. There is one restraining factor though, for both 401k's and IRAs, and that is, the greater the number of people who use them the greater the outcry if congress were to exercise their penchant for more green. This fact may end up being what keeps these programs intact, especially if many of our elected officials are taking advantage of them too. Anybody know any statistics here?I had a friend in college who didn't trust the govt either and kept his funds post tax for that very reason.

Yeah, I'm staying away from the Roth. There's nothing to stop Congress from changing the rules and deciding to tax them. People who recommend this stuff wholeheartedly have a lot more faith in politicians than I do.

>>>Yeah, I'm staying away from the Roth. There's nothing to stop Congress from changing the rules and deciding to tax them. People who recommend this stuff wholeheartedly have a lot more faith in politicians than I do.<<<

I'm curious if anyone can come up with a similar example where Congress set up something with a specific major benefit (in this case, the tax-free withdrawal of Roth IRA money), and later retroactively changed it.

My example would *not* include, for example, the changing of the IRA rules, because those changes were not retroactive and applied only to new contributions(i.e., just because Congress declared IRAs were no longer deductible, one did not have to go back and pay taxes on earlier deductible contributions).

This is probably just a long way of saying, yes... Congress may change the Roth rules at some point in the future, even no longer allowing tax-free withdrawals of new accounts. But I just don't think they would ever be able (politically) to tax existing Roths. Can you imagine the outcry of millions of people who paid taxes in order to convert traditional IRAs? Just not politically feasible, IMHO.

I have seen others raise very valid points about the benefits of Roths being undermined in indirect ways... abolishing all income tax in favor of a national sales tax, for instance. But I just don't see Congress retroactively taxing all Roth withdrawals.

Just my .02 (U.S.),

orangeblood

DavidBB,

<<There is one restraining factor though, for both 401k's and IRAs, and that is, the greater the number of people who use them the greater the outcry if congress were to exercise their penchant for more green. This fact may end up being what keeps these programs intact, especially if many of our elected officials are taking advantage of them too. Anybody know any statistics here?I had a friend in college who didn't trust the govt either and kept his funds post tax for that very reason.>>

It's a factor that weighs heavily in how Congress decides. Keep in mind, though, they can approach the taxation indirectly. A flat tax or national sales tax is one way. Another is tying tax benefits to AGI to reduce eligibility for deductions. They could say as an example that Roth income won't be taxed but will be counted in AGI to see if you fall outside some arbitrary limit for something else that may cause a reduction in taxes. They play those games all the times.

Regards……Pixy

Stipple,

<<Yeah, I'm staying away from the Roth. There's nothing to stop Congress from changing the rules and deciding to tax them. People who recommend this stuff wholeheartedly have a lot more faith in politicians than I do.>>

And dem's da choices everyone has to make individually.

Regards….Pixy

Orangeblood,

<< Congress may change the Roth rules at some point in the future, even no longer allowing tax-free withdrawals of new accounts. But I just don't think they would ever be able (politically) to tax existing Roths. Can you imagine the outcry of millions of people who paid taxes in order to convert traditional IRAs? Just not politically feasible, IMHO.

I have seen others raise very valid points about the benefits of Roths being undermined in indirect ways... abolishing all income tax in favor of a national sales tax, for instance. But I just don't see Congress retroactively taxing all Roth withdrawals.>>

Nor do I. They'll come at the issue indirectly IMHO and FWIW.

Regards…..Pixy