Musings of a Patriot

Useless 401K

Why is it that the government gets to tell me when I can spend my money?

That’s a question I have asked myself many times. The “you can’t touch it until you’re 60” rule is proof of why it is not the business of government to get involved in what private citizens do with their money (within the bounds of the law). I remember hearing a story from the Romney campaign about Mitt Romney sitting down with his sons at dinner and asking them about their savings. He was surprised to learn that none of them had any savings in the form of 401K or IRA accounts. Their reasoning was that they could not afford to lock up money in that kind of long term plan because they would not be prepared if they had any financial emergency. I remember thinking “I can relate to that.” For Mitt Romney the result was that he now proposes a Tax Free Savings Policy:

Governor Romney Will Make Middle Class Savings Tax Free. Governor Romney’s plan will allow middle class Americans to save tax free by changing the tax rate on interest, capital gains and dividends to absolutely 0%. By helping more Americans save and invest, we can meet the challenges of an aging population and ensure the financial security of America.

– Governor Romney’s Plan Will Allow Over 95% Of American Families To Save And Invest Tax-Free. Any taxpayer with Adjusted Gross Income of under $200,000 would pay a tax rate of absolutely 0% on all of the income they earn from their savings, capital gains and dividends.

My experience has been that I got a job and could not contribute to the 401K plan at the company for 6 months – of course that was when I was technically working as a contractor from a temp agency. At the end of the 6 months my job status changed to being a direct employee of the company and the clock restarted on their waiting period before I could contribute to their 401K plan. I had hardly begun contributing to that 401K plan after their waiting period before the company started downsizing and I was out of a job. I now work for a very small company that does not offer a 401K so I have to roll over my pittance from the other plan into a personal IRA, but I can’t actually invest the money until I have many time more money than I would be rolling over. My current company offers a 403B but there is no guarantee of their matching anything I contribute so the incentive is absent.

As I was contemplating that predicament I also started to consider the implications of contributing to either a 401K, a 403B, or an IRA – anything I might put in any of those would be locked away. What if I had a need, or what if I wanted to retire early? If I put my savings in any of those I would have to have a separate means of savings to fund an early retirement. Essentially the government is locking me into working for at least 30 years unless I have a very lucrative career.

From my perspective the tax-free savings policy sounds like a good thing. I hope it gets enacted. Maybe our current lame-duck president could start pushing for it. If he did I can guarantee that I would view him more favorably at the end of his term than I currently view him.

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David

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11 responses to “Useless 401K”

  1. Obi wan liberali Avatar
    Obi wan liberali

    How would that work? Once you exceed $200,000 in agi, do you now get no exemption from tax? On what basis is $200,000 the cut off? I would expect that the majority of the tax free savings would go to those making between $150K and 200K simply because of sheer opportunity to save. This kind of tax break would provide no relief for those with the kind of expenses that put them in a paycheck to paycheck situation such
    as people facing health care or therapy issues.

    Before agreeing to Mitt’s plan, I would need to see alot more details.

    Reply
  2. David Avatar
    David

    I agree that we would need a lot more details, and that those closer to the top of the $200K limit would see the largest benefit in dollars. Those are the people who are more likely to be saving and investing already. There is no such thing as a tax break that puts more money in the pockets of people who are living paycheck-to-paycheck except a reduction in sales tax.

    The potential benefit that I see in the Romney proposal (and I suspect this is part of the reason that he proposed it) is that this might encourage savings by people lower down the economic ladder who don’t save because they feel no need to tighten their belts just so they can be taxed again on whatever they earn from saving.

    Also, as I understand the proposal, I would be able to save money in whatever vehicle makes the most sense to me rather than being stuffed into a 401K or similar account where I can’t use the money if I ever need it before I’m 60.

    Reply
  3. Bill Avatar
    Bill

    You are confusing the 401(K) with a necessity. It is a way to help the average american to save for retirement. For those who can’t save on their own. It’s a great program.

    The 401(K), like so many other incentive programs is driven around tax law. There is no attempt to make it sensible, or justifiable.

    Currently the limit on when your exemptions are limited is much lower than $200 K.

    The brilliance of raising the cut off to $200 K is a “Tax break for the rich”. Historically (and economically) this is a wise decision.

    401(k)’s are created under the idea that you can get a tax break and some extra compensation without being taxed on it.

    The premise is that you are making a compromise. You agree not to touch your money, the government agrees not to tax it. WIN-WIN

    As with any contract, there is a penalty for breaking it. You CAN touch your money before your 60, but you pay a penalty.

    That’s life, live with it.

    If you want to avoid those restrictions, its simply up to you to find an alternate method of investing your money that does not place those restrictions on you. You play a give and take game no matter.

    Besides all of my ranting because I think people simply REFUSE to deal with any risk, the IRA’s have several forms and options, the money isn’t as locked away as you say it is. There are options to remove the money for specaial unforseen circumstances that may arise… And it can be done without paying penalties (see your prefered tax specialist for details)

    Furthermore, Mitt’s conversation is with his children. My expectation is that not one of them is living paycheck to paycheck, and they all probably have a little boost from Daddy every now and again, (at least while they get their financial capacity developed). As such, their unwillingness to tie their money into 401(k)’s becomes an issue of their unwillingness to part with the flexibility of not using the government endorced programs. They simply want to limit the influence of the government in their lives…

    Again, a personal choice.

    If you want flexibility, get a whip, if you want security, get a demacrate; they’ll tax you, but you can guarentee there will be an advisory committee over every aspect of your life.

    Reply
  4. David Avatar
    David

    So, exactly when did it become the job of government to make a contract that I had to keep working until I am 60 unless I want to be penalized for it? That’s the thing that gets me. I should be able to save as I choose and be taxed only as I use the money – in other words, I get taxed on the money I invest only on those portions I cash out during the tax year.

    Reply
  5. Bill Avatar
    Bill

    Your complaint is what?

    You can earn money in the stock market, not touch the money, and not be taxed on the money (except on dividend), until you sell your stock.

    So you are complaining because you subscribe to a government plan, but you don’t want to the consiquences of that decision.

    I don’t have an argument with your complaints about 401(k)’s; but I don’t see the issue. If you don’t like it, don’t do it.

    Reply
  6. David Avatar
    David

    To put money into the stock market I have to take money I have already been taxed on (as income) and then place it in the market which is a gamble unless I have enough money to buy a variety of stocks – on top of that I have to pay a fee each time I buy stocks and I get taxed on dividends. That’s a steep barrier for entering the market.

    The 401(K) was designed specifically to lower that barrier because I can put in whatever I can afford before it is taxed and place it in a diversified portfolio without a 4 figure starting balance.

    Reply
  7. Bill Avatar
    Bill

    A no fee arrangement can be easily obtained to allow you in to the market, and using post tax dollars to start the funding is a piece of the decision not to involve the government.

    By using a 401(k) you are agreeing to allow the government to regulate the use of money that you have earned and should, therefore be taxable, in exchange for not being taxed on it until it is removed at a later date.

    Besides that, there is an investment credit to mitigate the taxes you pay on the income you invest outside 401(k)’s

    Reply
  8. Bill Avatar
    Bill

    I also forgot, there are mutual funds that can be purchased like stocks in order to mitigate risk.

    I see no reason to worry about 401(k)’s unless you need a savings plan, or your company offers a “Match” option.

    IRA’s are tax vehicles without question.

    Reply
  9. David Avatar
    David

    By using post-tax dollars I am choosing not to involve the government – that’s nice, but post tax means the government has already been involved. If they really want to encourage savings (as they claim) then they would drop the barriers completely. They don’t want to encourage savings, they want to control savings.

    I have never seen a mutual fund that I could purchase like stocks at $10 or $25 a share. Everything I have seen costs hundreds or even thousands to start in mutual funds. If you can show me some new ones I would be very happy.

    Reply
  10. Avatar
    Anonymous

    Try Vanguard. I bet they have funds with little to not much required to start.
    https://personal.vanguard.com/VGApp/hnw/FundFinder?FW_Event=Input&NavStep=6&tb=10

    or internet banking to start saving at a higher rate until you can move it to stocks.

    http://www.chicagofed.org/consumer_information/what_you_should_know_about_internet_banking.cfm

    http://www.fdic.gov/bank/individual/online/safe.html

    Google Searches related to: internet banking internet banking rates internet banking reviews online banks aib internet banking
    westpac internet banking hsbc internet banking usa login ebank us hsbc internet banking wells fargo internet banking

    Reply
  11. David Avatar
    David

    Thanks – I’ll look into Vanguard. I’m already doing internet banking.

    Reply

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