Podcast Summary
The debate over traditional vs. Roth 401(k)s: Consider individual financial situation and tax rate in retirement when choosing between traditional and Roth 401(k)s, as tax advantages may change.
While the headline about 401(k)s potentially disappearing in the next decade may seem alarming, it's important to read beyond the headline. The author's argument is not that the money in your 401(k) account will be gone, but rather that the tax advantages of these plans could be on the way out. This debate between traditional and Roth retirement plans is a common topic in personal finance, with the traditional plan allowing for tax-free contributions but taxed withdrawals during retirement, while Roth plans are taxed upfront but offer tax-free withdrawals in retirement. It's essential to consider your individual financial situation and tax rate in retirement when deciding which plan is best for you. The article's matter-of-fact acknowledgment that retirees often have lower earnings and therefore lower tax rates is a good reminder of this point. Ultimately, it's important to approach financial news with a critical eye and not let sensational headlines sway your decisions without considering the full context.
Federal Government May Eliminate Favorable Tax Treatment of 401(k) Plans: The elimination of the favorable tax treatment of 401(k) plans could cost the government $185 billion per year, with high-income earners receiving the largest tax savings. The impact on middle class savings is uncertain.
The federal government may be considering eliminating the favorable tax treatment of 401(k) plans as a desperate measure to increase revenue. This could result in a loss of $185 billion per year, which is roughly 1% of GDP. The impact of this tax break on the government's budget is particularly significant for high-income earners, who receive larger tax savings due to their higher marginal tax rates. However, the middle class also benefits from this tax break, and it remains to be seen how much of this revenue would come from those who are truly middle class versus upper-income earners. It's important to note that while individuals may save money through this tax break now, they will eventually have to pay taxes on that money in the future. The article raises interesting questions about the priorities of government spending and the potential impact on different income groups.
Taxes on retirement savings: A net gain or loss for the government?: The government may not experience a net loss from tax savings on retirement accounts due to subsequent taxes paid during withdrawals, but the impact on revenue depends on the individual's income during retirement
While individuals may benefit from tax savings through retirement accounts like a 401(k), the government still receives taxes on those investments or withdrawals at a later stage. The net effect of these tax savings and subsequent taxes paid might not result in a net cost of zero for the government, especially when considering the 10-year timeframe for emptying an inherited account. It's essential to note that there is a valid criticism that people might pay less in taxes during retirement due to having lower income, leading to less revenue for the government. The ongoing debate about the $185 billion tax deferral might not have considered the net effect of savings and withdrawals, but rather focused on the line item for tax deferrals. Both Democrats and Republicans have reservations about this issue, with Democrats concerned about its impact on the middle class, and Republicans potentially interested in reducing deficit spending. Ultimately, the rise and grind lifestyle of minimizing taxes through early retirement strategies might not be feasible for everyone, but tools like Betterment can help individuals optimize their investments and savings.
Retirement savings: Working 24/7: Automated investments and dividend reinvestment keep your money working around the clock for retirement, while the debate continues on the impact of eliminating tax-advantaged retirement accounts.
Your money doesn't need to take a break, even when you do. With automated investments and dividend reinvestment, your money works 24/7. The conversation around retirement savings brings up interesting points about the shift from pension plans to individual responsibility, and the potential impact of eliminating tax-advantaged retirement accounts. Some countries, like Denmark, don't have such accounts but have robust state-sponsored pensions. However, for those without such safety nets, saving for retirement may feel daunting. The argument is that people will still save, even without tax incentives. But, for many, retirement savings may not be their primary focus. The article also mentions the potential elimination of Social Security and Medicare, making retirement savings even more crucial for some. Economist Andrew Biggs, who was previously mentioned in our teacher pay episode, was a notable figure in this discussion.
Teachers' Pay and Incentives: Teachers may not be underpaid, but it's crucial to utilize incentives like 401k plans while they last. Live below your means and understand the value of your income.
Despite common beliefs, teachers may not be underpaid when compared to similarly educated professionals working similar hours. Andrew Biggs, a frequent source in articles making this argument, emphasizes the incentive structure changes that could impact 401k plans. Katie suggests taking advantage of these benefits while they last, as they are truly use-it-or-lose-it. The discussion also touched upon the importance of saving and living below your means, as demonstrated in an anonymous listener's story about a college roommate's father who was arrested for not reporting $8,000,000 in gambling profits. The fear of misreporting taxes, even small amounts, was contrasted with the father's significant oversight. Overall, the conversation emphasized the importance of understanding the value of your income and the benefits available to you, and making the most of them while you can.
Trust should not be blind: A story of financial risks and red flags: Blind trust can lead to significant consequences. Prioritize transparency and accountability, learn financial literacy, and recognize signs of addiction to protect yourself.
Trust should not be blind. A father's gambling addiction led to a 3 to 5 year prison sentence and unreported profits for over 20 years. Despite this, his roommate continued to trust him to do her taxes every year. This story serves as a reminder that past relationships and trust should not overshadow potential risks and red flags. It's essential to be aware of the actions and behaviors of those we trust, especially when it comes to financial matters. Blind trust can lead to significant consequences, and it's crucial to prioritize transparency and accountability. Additionally, the story highlights the importance of understanding financial matters, such as taxes, to avoid taking unnecessary risks. The speaker's past lack of interest in taxes made her more susceptible to trusting someone with a questionable track record. By taking the time to learn and be involved in our finances, we can make informed decisions and protect ourselves from potential harm. Lastly, the story underscores the potential consequences of addiction, whether it be financial, emotional, or otherwise. Addictions can be challenging to overcome, and they can negatively impact not only the individual but also those around them. It's essential to recognize the signs of addiction and seek help when needed. In conclusion, trust should not be blind, financial literacy is crucial, and addiction can have far-reaching consequences. These are the key takeaways from the story of the gambling father and his roommate.
