Comments on: Leave Our 401(k)s Alone!

By: Mythbuster1

Mythbuster1 — Mon, 24 Nov 2008 00:09:21 +0000

Welcome to the New World of wealth confiscation, part 1. Previous administrations gave us a glorious chance to take personal responsibility for our investments in the form of 401ks and IRAs and many did quite well.

Lately, events occurred that showed we need to do more than watch Cramer to protect our investments.

I guess we weren’t smart enough to hit the Money Market button on our 401k or IRA investment selector last spring but oh well. Since it is difficult to blame ourselves for our own investment ignorance, maybe we should trash our 401ks and IRAs and let Big Brother invest for us.

Now that’s a great idea. Big Brother will show us how investing should be done by replicating the ever favorite Social Security Ponzi scheme. I don’t know about anyone else, but having my investments in a parallel universe to the Social Security system will make me feel ever so comfy.

By: Deborah

Deborah — Thu, 20 Nov 2008 13:29:02 +0000

401K’s are not unfair. You defer tax which means you pay whatever the income tax rate is when you retire and start withdrawling from the IRA. For example, if my tax rate is ?? now, I can have 6% of my income put away in 401K before taxes are taken out. This lowers my taxable income which is an incentive for me to save….that is a good thing. However, when I retire and start withdrawling from that 401K, I will have to pay whatever the tax rate is at the time of my retirement. The tax rate could be more or less than it is now so I’m taking that chance. What we hear little about is the Roth IRA. The Roth IRA is after-tax money that you contribute yourself up to $5000/year or more depending on your age. You can begin withdrawling tax free at age 59-1/2 because you have already paid tax on that money. Since we don’t know what the tax rate is going to be when we retire, it is wise to have half of your retirement in a 401K and half in a Roth. The Roth gives you a lot more flexibility and has other benefits to it that the 401K does not have. I like that I can control my Roth and determine where I want to invest it instead of being at the mercy of some investment firm like we are with our 401K’s.

By: Doug

Doug — Tue, 18 Nov 2008 19:14:05 +0000

Historically speaking, it’s interesting to see how salaries get reduced by a slow change of retirement benefits. In the 1950’s and 1960’s you have defined-benefit pension plans based on time of service with the company, etc. These are in addition to the salary and are part of the overall compensation for labor. In the financial turmoil of the 1970’s, with high rates of inflation, these pension plans become much less attractive, so employers introduce 401k-type plans, to be used in addition to pensions. These new plans are to be funded by taking withdrawals directly from the paycheck. Since these plans invest directly in various types of securities, they are touted as something that will keep up with inflation. Consequently the defined-benefit pension plans, which an employee got in addition to the paycheck, slowly disappear during the 1980’s and 1990’s with the understanding that inflation makes them a less reliable source of retirement funds than a 401k. Note that there is a changeover period during which both 401k’s and defined-benefit plans exist. This makes it less obvious what is happening as time goes on and defined-benefit plans go away, forcing many employees to fund their retirement entirely from their paychecks. Now, today, we have deflationary financial turmoil, severely degrading the value of most employees’ 401k’s, and the politicians want to regulate 401k’s so that their retirement benefits become more predictable — that is, we’re going back to something like the 1950’s and 1960’s defined-benefit pension. Pay attention, however, to what’s happened to the salary portion of employee compensation over the last 50 years. Those 1950’s and 1960’s pensions were in addition to the employees’ salary, and now the “new” pension-equivalent, more predictable 401k’s will be funded by withdrawals from the paycheck, just like in the immediate past. Slick, huh? Employees have had their overall compensation reduced over the decades in such a way that only the oldest of old codgers are in a position to notice what’s going on. People who retired in, say, 1970, with a generous defined-benefits pension based on several decades of service, saw the value of the pension severely reduced by the 1970’s inflationary financial collapse. People retiring in the next few years, looking forward to living on their 401k’s, are now seeing their 401k values disappear in a deflationary financial crash. Sometimes I think there’s a lot to be said for John Derbyshire’s observation that modern society often looks like a conspiracy of the more intelligent against the less …

By: Andy

Andy — Tue, 18 Nov 2008 06:18:34 +0000

There’s that word again, “unfair”.

By: Ken

Ken — Mon, 17 Nov 2008 21:19:38 +0000

@Jon – Why don’t you quit your current employer for one that offers 401k’s?

By: Jon

Jon — Mon, 17 Nov 2008 20:39:20 +0000

401k’s are indeed an unfair situation. My company doesn’t have a 401k plan, so I’m limited to saving for retirement with an IRA. What’s up? Why should 401k plans be tied to your employer?

By: Stacey

Stacey — Mon, 17 Nov 2008 02:27:54 +0000

@ Poor Boomer, 401k’s are used to incent employees to save. If you want to lower your taxes, contribute to an IRA. Although the limit is lower, and obviously there is no employer match, it is a way to get started.

You also may want to look into the Retirement Savings Credit. See the following IRS links:

http://www.irs.gov/newsroom/article/0,,id=172969,00.html

http://www.irs.gov/formspubs/article/0,,id=177967,00.html

By: Gerard

Gerard — Mon, 17 Nov 2008 01:54:18 +0000

JLP/American readers
I would love to hear your thoughts on a system similar to that we have in Australia

Essentially, under Australian superannuation the employer is obligated to contribute 9% of your base salary. The monies can be put into any superannuation fund, run by various private funds or alternatively, you can set up your own. In addition, the system allows for after-tax and pre-tax additions to the fund with various incentives (including govt co-contributions depending on income level). Superannuation is concessionally taxed which is always a plus when you the tax rate goes up to 45%

By: poor boomer

poor boomer — Sun, 16 Nov 2008 16:53:29 +0000

“They” are the people with a 401(k) who get a tax deferral.

I don’t understand why workers without a 401(k) or health insurance should pay a higher effective tax rate than a worker with either of these and equal compensation.

And I really don’t understand why someone earning $20K without health insurance or a 401(k) should pay more tax than someone earning $25K with a 401(k) and health insurance which reduces their taxable income.

By: JLP

JLP — Sun, 16 Nov 2008 03:21:24 +0000

poor boomer,

Who’s “they?”