Mike Kueber's Blog

July 29, 2012

Retirement investing in the age of Romney

Filed under: Investing,Issues,Politics — Mike Kueber @ 6:47 pm

My investing for retirement benefited from lucky timing – I worked when there was an overlap of the pension age and the 401(k) age. 

When I entered America’s fulltime workforce in November of 1979, many employers, including my three employers from 1979 to 2006, provided pensions to their employees.  In 1978, however, a small seed was planted that eventually grew into something so big that it overshadowed pensions in my lifetime.  That seed is called 401(k), a provision in the Internal Revenue code that allows employees to invest deferred income and to avoid paying taxes until the income is eventually claimed during their retirement. 

The 401(k) started small, with few people recognizing its potential.  When I started with State Farm Insurance in 1981, I think they called it their Incentive & Thrift plan, with annual limits of about $300 ($25 a month), which the company would match if it had been profitable that year.  When I arrived at USAA in 1987, I think their plan was called Savings & Investment Plan (SIP).  At some point, the name 401(k) was adopted as the generic title for all these plans.  In fact, Wikipedia reports that the term 401(k) is even used in other countries to describe their plans even though their enabling laws  are not enumerated 401(k).  The amount that can be deferred is currently capped at $17,000 per year.          

In 1998, the federal government created some competition for the 401(k) by creating a Roth IRA.  The Roth doesn’t defer income, but rather it allows an employee (a) to invest money that has already been taxed and (b) to not pay taxes on any capital gains.  Although most investing experts equivocated on their analysis, there was a slight consensus that the Roth IRA was probably preferable to the 401(k).  A major drawback for the Roth IRA was that its cap, currently $5,000 a year, was much less than the 401(k).  In 2006, however, this drawback was eliminated by the creation of the Roth 401(k).

The comparison of Roth to non-Roth accounts might be further complicated if Mitt Romney becomes president in 2012.  According to MittRomney.com, Romney proposes to eliminate taxes on dividends, interest, and capital gains on taxpayers who earn less than $200k a year.  .  Inexplicably, this fascinating proposal has received little coverage or analysis.  Obviously, it would encourage non-wealthy taxpayers to save and invest.  I wonder, however, how it would affect the Roth v. non-Roth analysis. 

One of the major advantages of Roth investments is that taxpayers don’t have to pay taxes on their capital gains, as compared to the 25%-35% rate on gains under a 401(k).  Well, under Romney’s proposal, non-wealthy taxpayers would never have to worry about capital gains, so the Roth vehicle would become superfluous.  And if Roth is better than the non-Roth, then the non-Roth would be less than superfluous.

There are, however, two advantages of the Roth and non-Roth plans, that promise to keep them in play:

  1. Most employees don’t have the necessary discipline to save and invest independent of a formal company structure.
  2. Most employers provide employees incentives to participate in a company plan by matching contributions.

For taxpayers with discipline, the enactment of the Romney proposal might generate the sort of energy that capitalism thrives on.


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