“I wouldn’t care if they phased out all iras and pretax accounts and made them roths.”
For working folks who happened to save diligently and now have several hundred K in those accounts, it would mean a huge tax hit in their present tax bracket.
Our company offers the match to those who put their money into a Roth/401k; hopefully, other companies would do the same.
@BunsenBurner I am very aware of the tax hit, thats why i said ‘phased’ out, no new contributions. Those with existing pretax accounts would keep their deferred tax status.
@bluebayou my company does as well. My point was if they cap the 401k deductions, it wont matter how generous the match is, because you are only matched on what you put in. Right now the 402 g limit is 18,000 for 2017, the article said 2400 is floating around as a cap, that would drastically cut the match. Also if your company doesnt do a true up at years end, you could max out very early in the year.
^^If I interpret correctly, the cap would be on pretax contributions. I was assuming (perhaps wrongly) that today’s Roth limit of $18k would remain, and thus any match could continue.
Of course, I have no doubt that many folks will reduce their contribution if it is mostly post-tax. And yes, a lot? of companies do not true up at end of year.
@bluebayou good point! I would suppose they wouldnt care if you moved more to post tax, but that would only be good if we can keep the lifetime earnings on those contributions tax free, and if your company still matches on post tax. Heck the only way I can contribute to a roth is within my 401k, our income is too high to contribute outside of a 401k.
Though at any income you can do a backdoor Roth…but might not be worth it if you have to pay taxes on other IRA’s to do so.
If the earnings within the retirement account continue to be shielded from yearly taxes, then you can note that traditional versus Roth ends up being the same if your tax rate is the same at both contribution and withdrawal time (of course, tax rates do change, but cannot be predicted).
For example, if your tax rate is 25% both now and years later when you withdraw, and the investment gain is +100% between contribution and withdrawal:
A. Traditional: $1.00 goes in, grows to $2.00, withdrawn leaving $1.50 after taxes paid at withdrawal.
B. Roth: $1.00 taxed to $0.75 goes in, grows to $1.50, withdrawn at $1.50 tax free.
Of course, from the government’s point of view, the difference is that it collects $0.50 years later in the traditional scenario, but it collects $0.25 now in the Roth scenario.
If both traditional and Roth have nominally the same contribution limit, the Roth effectively has a higher contribution limit. Suppose the contribution limit is $1.00. Then compare this scenario to those above:
C. Roth: $1.33 taxed to $1.00 goes in, grows to $2.00, withdrawn at $2.00 tax free.
But don’t you plan to withdraw from your traditional IRA when you are no longer employed, and therefore when youh have a lower tax rate?
Of course folks often assume they will be in a lower tax bracket/rate when they are older and retired but it doesn’t always turn out that way.
Similarly most folks assume they’ll be in a lower tax rate when they’re earlier in their career and younger than later in their career but sometimes that isn’t so either.
Another point is traditional IRA is taxed at the ordinary income tax rate even if the gain is mostly from appreciation of stocks. If you kept them in a taxable account, that would have been taxed at a lower capital gains tax. Your tax rate would have to be much lower to make it beneficial. Some time ago, I decided for us it’s better to pay tax now and keep as much as possible in roth.
If I can have a wish list in new tax, it would be eliminate all the deductions, lower the estate tax exemption, create another bracket for highest earners, and limit the accumulation amount in retirement accounts.
That is why a common recommendation is to put taxable income producing assets in the tax shelter, but keep the capital gains assets like most stocks in a taxable vehicle.
Yes but retirement accounts are for a long term and well suited to park stocks in them except the ta\xes. Besides, how many people have sizable savings outside of 401k? Personally, i don’t understand why people think it’s bad if new tax proposal forces more people to save in a roth account. It’s painful now but it is a better deal in the long run.
Limiting the accumulation amount in a retirement account seems quite invasive, how do you do that? You saved too long, too often, invested well, so now you must be punished? People already have to take RMDs at age 70 1/2. I can see limiting the amount people can put into an account, but not be penalized for long term investing.
@busdriver11 agreed. I think it’s awful that they force you to take an MRD the year after you turn 70 1/2. If you don’t need it and want to leave it to heirs it shouldn’t matter.
Also one shouldn’t be penalized for long term investing especially since most companies have gotten rid of pension plans.
No, you keep on saving but it won’t be tax advantaged beyond a certain amount. Last year Obama adm proposed $3M max. At 4% annual return, that meanes up to $120K is tax sheltered one way or other. I think that’s a reasonable amount. That will stop someone like Romney from keeping gazzillion dollars in a roth account. It comes down to who the gov should help. I’d say help people with basic need and not for unlimited accumulation. Accumulate as much as you wish but do it in a taxable account. Taking away tax advantage is not penalizing. You are doing well enough without gov assistance.
Except in reality, it doesn’t always work this way. If you leave your money in a Roth, it can grow far more than 100%. And if you’re doing smart investing, pay the taxes outside of a Roth.
For example, ( I know I’ve used this example many times on this forum), we gave an investor friend about 20K many years ago. We converted it to a Roth when it was worth approx 150K, paid 45K in taxes outside of the Roth. Painful. However, it could easily grow to millions, and we never pay taxes on that. Never have to take RMDs until we choose. There’s no situation that I see where it would have worked out better not to convert it. We never would have invested the 45K we paid in taxes (because we borrowed it).
Except Romney wasn’t just a regular retirement saver plugging his 401K limit in faithfully for decades, like the rest of us. He got to benefit from rules that benefit the super rich and finance industry. I definitely think they should do away those deals.
My wish is tax me anyway you want but I don’t want to do any paperwork and keep any tax records. I am too old to calculate money benefits, to shop for health insurance,… Let me live. I am choked.