Tuesday, August 18, 2009

Reconsidering the Roth IRA and 401k

I have recently come to question the legitimacy of tax deferred investments for retirement. I have long held the belief that these were wonderful opportunities to escape taxes either now or during retirement. I loved the idea of not giving the government all the money it thought it deserved. But life situations have made me realize the heavy costs involved in the tax deferral bargain.

To begin, the money we earn from our employers is ours. Once we receive the check or the money is deposited in our bank account, that money is ours to use for whatever purposes we desire within the confines of the law. The same goes for any money invested in stocks, bonds, CDs, mutual funds, real estate, etc. Naturally there are certain restrictions to these investments, but the money is ours and once the sale or term is complete the money is again ours.

But tax deferred investments, particularly the most popular—the Roth IRA and the 401k have very exclusive restrictions on them, that admittedly, are widely known. For example, you may only receive qualified disbursements from a Roth IRA when you're 59 ½ years old, when you've died, after you've become disabled, or for first-time home purchase. You may only receive qualified disbursements from a 401k after you've died, when you've switched jobs, your company goes out of business, or you turn 59 ½ years old. You may receive unqualified disbursements, but you will be taxed and likely penalized for early withdrawal.

As R. Nelson Nash notes in a recent article, "these plans are a function of the IRS Code." This means that the money is only yours inasmuch as the IRS allows you to possess it. How many people have truly understood the kind of bargain they are making when they hand their money over to IRS regulated investments?

I urge you to read Nash's article and reconsider the legitimacy of government sponsored tax deferred investments. He writes:

"Consider then, this reasoning – when government creates a problem (onerous taxation) and then, turns around and grants you an exception (any tax-qualified plan) to the problem they created – aren't you just a little bit suspicious that you are being manipulated? All of these plans were introduced as a means of helping citizens out. If they really wanted to help, all they had to do is reduce the taxes! Do you really think they want to do that? The real object is to control your life!"

Nash also urges us to consider that the 401k and the typical IRA is based upon the premise that your future tax bracket will be lower than your current bracket. Think about this for a minute. Do you truly think that your tax bracket will be lower in the future when our nation is increasing its indebtedness every single year? Is it possible that taxes will remain this low for another decade, let alone multiple decades?

Early in his article, Nash writes, "In early October 2008 the incoming administration had personnel discussing confiscation of all such plans and combining them into a Guaranteed Retirement Account, or some name like that." This isn't just a scare tactic; these
are out there and were widely discussed during the market crash last fall. When the market crashes again these proposals will resurface. Perhaps it is time to reconsider tax deferred investing and time to consider saving in your own way with your own rules.

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