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Forget the 401(k) – Let's Invent a New Retirement Plan
- toomuchtodo 8y ago> Ideas include allowing your savings to follow you wherever you go or however you work IRAs (which should replace 401ks entirely)? Wage increases so workers can afford to save for retirement (and not need to raid their retirement accounts for emergencies)? Also seems like a submarine piece for annuities. 401ks are underwhelming as a product. Congress should provide IRAs the same creditor protection, allow employer contributions, and incentivize a streamlined onboarding process (just as you provide ACH routing and account number for your checking account rontour employer, you’d provide the same for your IRA). This ensures portability, low costs (lots of competition in the IRA space), and also prevents junk fees from 401k administrators since you’re not a captive audience.
- renholder 8y ago>401ks are underwhelming as a product... Agreed. It wasn't too long ago that The Crash[0] wiped-out a large portion of people's life-savings. >Congress should provide IRAs the same creditor protection, allow employer contributions, and incentivize a streamlined onboarding process... Couldn't agree more but what you're - essentially - describing is no different than the pensions as exists in Europe [1,2,3,4]. This isn't meant to be an affront but, for some reason, Americans have grown adverse to the idea of pensions; even though previous generations of Americans enjoyed the fruits of that very same labour. [0] - https://www.cbsnews.com/news/retirement-dreams-disappear-with-401ks/ https://www.cbsnews.com/news/retirement-dreams-disappear-wit... [1] - https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-relief-for-pension-contributions.aspx https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-rel... [2] - https://www.deutsche-rentenversicherung.de/Allgemein/en/Inhalt/01_deutsche_rentenversicherung/unternehmensprofil.html https://www.deutsche-rentenversicherung.de/Allgemein/en/Inha... [3] - https://www.island.is/en/senior_years/pensions_and_benefits/pensions/ https://www.island.is/en/senior_years/pensions_and_benefits/... [4] - https://www.pensionsmyndigheten.se/content/dam/pensionsmyndigheten/blanketter---broschyrer---faktablad/other-languages/presentations/Summary%20on%20the%20Swedish%20Pension%20System,%20by%20Bo%20K%C3%B6nberg.pdf https://www.pensionsmyndigheten.se/content/dam/pensionsmyndi...
- jogjayr 8y agoI'm sorry I'm not sure I understand. How is a retirement account that you control, and whose investments you direct, the same thing as a pension? I always thought that a pension was defined as: "Contribute $A/month for X years, and we'll pay you $B/month for Y years after you retire - and don't worry about how it happens, you're guaranteed this money if you qualify." Is that not how pensions in Europe work?
- deleted 8y ago[deleted]
- thisone 8y agoNot in the UK, not anymore and those that do still exist are remnants that don't accept new members. Work place pensions now are like investment accounts, except you have some degree of matching from the company and the government tops you up an extra 20% of what you contribute (it gets more complicated when you get into higher tax brackets, like getting 40% top up on portions, but getting it back by raising your untaxed income level instead of directly into the account. And very high earners it gets more complicated) As an individual you can also open a SIPP which is a personal pension investment account, get all the government benefits but no company match of course.
- lotsofpulp 8y agoWhat 401k were “wiped out”? The selling price for the assets in the 401k was only down for a few years, and then they were reinflated and tripled within 10 years. And defined benefit pensions and 401k are invested into the same assets, the government doesn’t have a secret stash of risk free 8% return investments. What they do have is the ability to fudge the numbers by setting inappropriate assumptions and buying government employee votes with crazy promises 30 years into the future, backed by the power to tax everyone into oblivion.
- fuckyah 8y agoI have no issue with my 401k. It's tax deferred money, so fuckyah!
- randomacct3847 8y agoGet rid of the Roth IRA income cap and raise the max annual contribution limit 4x. Not that hard.
- tracer4201 8y agoI'm disqualified from contributing to a Roth IRA. My uninformed speculation on why Roth IRA income caps and max annual contribution limits exist is that it's the sake of tax revenue.
- stouset 8y agoIn practical terms, you’re not. Contribute to a traditional IRA. Roll it over immediately into a Roth IRA. You can do this regardless of how large your income is.
- votepaunchy 8y agoNote: unless you have existing savings in a traditional IRA.
- stouset 8y agoYeah, this is an important caveat. If you have existing IRA funds, roll them into a 401(k) first.
- garmaine 8y agoWait before rolling it over, probably at least 30 days. If you do it immediately it is considered a single transaction and illegal. If audited they’ll make you reclassify it and pay penalties.
- sokoloff 8y agoAny reference or citation for that? I have never heard that advice and a quick googling doesn't turn anything up either. I've generally heard the opposite advice (convert the next day to minimize exposure to [undesired] gains/losses while a traditional IRA).
- tracer4201 8y agoNo idea what the article says because I don't have a WSJ subscription. It would help if op could at least post a brief summary of what the author is for or against.
- deleted 8y ago[deleted]
- philwelch 8y agoOne of the most interesting ideas I've ever heard was to make any and all savings deposits and investments tax-deductible, just like traditional IRA and 401(k) contributions--with the caveat that future withdrawals or returns are, themselves, taxable income. This transforms the income tax into a consumption tax, incentivizes savings of all kinds, and allows existing deductions and tax credits to potentially keep the tax progressive. You could argue that people with higher incomes would pay a smaller proportion of their income as taxes, but this is beside the point--the only part of your income you can actually use is whatever you don't save or invest, and though you can just keep your savings and investments compounding indefinitely, you have absolutely no incentive to do so unless you are planning or anticipating for some future point in time where you or your heir withdraws and spends some of that money, which is exactly the point when that (typically much larger) sum turns back into taxable income.
- skybrian 8y agoThat would be quite the tax dodge. It lets you spread income over many years, whichever way has the lowest tax rate.
- iguy 8y agoRight now we charge someone who earns their lifetime income in 20 years much more tax than someone else who earns the same total income over 40 years. A change like this would remove this unfairness, but to collect the same total amount (over say 60 years for both now) the brackets would surely be different.
- bruxis 8y agoHere we go: https://outline.com/mk7hFT https://outline.com/mk7hFT
- Aloha 8y agoI think this an important thing to note - Pensions are great when they're good - but most were not that good. I do like the idea of a savings where I can contribute money to, where some of it ends up being for retirement, and some of it ends up not being. My biggest issue with the 401k, is the money is locked in there, so if I honestly needed it, I'd be kinda screwed from a tax point of view.
- randomacct3847 8y agoWhy is your money locked? I think people make wayyy too much of the withdrawal penalty. Or assume that you can’t even touch it until you’re retired. It could be way higher. If you need the money 10% is not that bad...especially if you have an employer contribution.
- gafferongames 8y agoIt's 10% penalty, and then you have to pay tax on it because it's income (at least from a 401k). This is where it gets painful.
- randomacct3847 8y agoSo what? It’s pre-tax dollars so yes you pay income tax. You will have to do that when you withdraw in retirement too. If it’s for a emergency..like you lost your job then presumably you’d be in a lower income bracket for that year.
- Aloha 8y agoThe penalty is unreasonable - that's my primary objection.
- randomacct3847 8y ago10% is unreasonable? Are you saying there should be no penalty? I’m arguing it’s low. Every Californian (or anyone living in a state with high income tax) pays a 10% penalty just to live in that state. Put another way, withdrawing from a 401k in a state with no income tax would probably amount to the same amount of tax any Californian pays on their normal income.
- kartan 8y ago> Workers would still be free to opt out of saving entirely This is never going to work. With so much people living check to check, who has the money to save? This approach supposes that we are hommo economicus able to take the best long-term decisions. We are not. For me, the easy solution is tax people now to pay the retirement of older people. Then, do that forever. It works in Europe. But, will this work with a diminish population? Is not this a pyramidal scheme? The reality is that productivity has gone up way faster than population is going down. The main problem is how to distribute that enormous wealth, not if there is enough for everybody.
- dbt00 8y agoWe call that social security in the US and that’s roughly how it works, other than the trust fund con.
- zeckalpha 8y agoAnd the regressive income cap.
- rattlesnakedave 8y agoWhy should I have to pay for someone elese’s retirement?
- deleted 8y ago[deleted]
- lotsofpulp 8y agoIn many tribes, the implicit contract is that if you are unable to have children, raise a family, suffer a loss of family, or become disabled yourself, then the tribe is still there for you. Tribes that have an every man for himself ethos don’t really work out in the long run. Turns out, working together and spreading risk over the tribe (or country) is more sustainable and productive, hence they thrive and have a competitive advantage.
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- homerhomer 8y agoThere's nothing like gambling with your retirement in the stock market.
- jeffbax 8y agoMight I suggest you read up on some state run pensions, and see how much worse they are doing. CA, IL, NJ, NY, MA are all having serious funding problems after years of sweet deals and overly optimistic returns (which have done far worse than the stock market) that the unfunded liabilities are eating other parts of the state budget (and all these states are already way overtaxed)
- bradleyjg 8y agoAs a matter of social spending policy the tax expenditures for retirement savings don’t strike me as terribly efficient. The benefit to society is that it encourages people to save during their working years so they won’t have to be supported by society during retirement. Fine, that’s decent reasoning. But in the system as designed most of the forgone taxes go to relatively well off people that would save and not end up on welfare regardless.
- cbhl 8y agoI really liked Canada's approach to this, the "Tax Free Savings Account". You get contribution room for every year that you are 18+ and a tax resident. Money goes in post-tax; withdrawals of principle and growth are tax-free. Withdrawals can happen at any time with no penalty; you get the contribution room back in the following year. Right now Canadians get $6000/year of contribution room; anyone who's been in Canada since they were introduced in '09 has something like $63k of contribution room accumulated. $6000 is a tangible number for a teenager with a part-time or summer job, and the lack of withdrawal penalties means that the account doubles as an emergency fund (which is what you should be doing with your first dollars if you go by r/personalfinance's chart). Then again, the Canadians also don't have the whole "savings accounts are limited to six withdrawals" nonsense.
- labcomputer 8y agoThe USA already has something very similar, called a Roth Individual Retirement Account (Roth IRA). The contribution limit is even the same, at $6k USD/year The main difference is that, before retirement age, Roth IRAs only allow the principal (not the growth) to be withdrawn without penalties. Also, people who earn more than around $150k are not allow to contribute to Roth IRAs (the exact threshold is based on a tax calculation called MAGI)
- cbhl 8y agoIn my opinion, the Roth IRA would be much more successful if it was for everyone, and not just "the poor". - Roth IRA is an investment account. Usually holds ETFs. TFSA can come both as a savings account and an investment account. People with lower MAGI are less likely to be able to weather the ups and downs of the market for their emergency fund. - $150k MAGI is literally "any job at Google/Facebook"; and also roughly the poverty line for family-with-two-kids in SF Bay Area due to the housing prices here. Who actually has funds to put in a Roth IRA through the front door? - Contribution room mechanism means that you have to know your MAGI before you can put money in it. In Canada, the banks display your contribution room on the online banking portal, because the calculation is the same for everyone. - Any mechanism for a withdrawal penalty makes it regressive. Rich people rely on accountants or TurboTax to track basis; with the TFSA you can just look at your balance to see if it's safe to withdraw money, making it accessible to young people and immigrants. - Rich people can contribute to the Roth IRA through a Traditional IRA, and in doing so, contribute more per year than folks contributing through the front door.
- empath75 8y agoGet rid of 401ks entirely, they’re just a giant tax benefit to the wealthy. Remove the cap on social security contributions and guarantee everyone a livable retirement with social security.