Will the indignities of the government never cease. Take your IRA for example – your savings for that stormy day when your earnings equal your bar bill – not including chips. Here’s the government still extending its open palm. YOUR IRA, YOUR money. And yet the state, backed by the Army, Navy, Air Force, Coast Guard and Marines demands that at 70 and a half years of age you must take a mandated percentage of your savings. Not 68 years of age, not 69 and a half, not 71 and three fourths, but 70 and a half. Like there’s something mathematically magic about three score and ten and six months. Have office buildings full of government economists slaved over the impact of this number on the US economy and found that at 70 and a half, its salubrious effect peaks?
Why must we take it then – why is there no choice in this matter of our savings? When they designed and passed the IRA legislation can’t you see a covey of congressmen declaring that they must not give their tax-paying subjects, even this small break, without somehow constricting their choices. The usual attitude of the Giant Governmental Anaconda. Choice is bad, law is good, hisses the Giant Governmental Anaconda.
“Tell ya whatâ€, says a wizened,old 8 term encumbent. “Let’s insert in the bill a forced withdrawal at 70.5 years of age.
“Why?â€, ask the young uncorrupted first termers.
“Oh just for the hell of it – just to show ‘em it’s our call, not theirs. Wouldn’t be wise to give the people too much power over their own money. Next thing ya know they’d question Social Security – why those accounts grow as slow as fungus on a dry log. Besides, we don’t want to put off forever the taxation on that money. The sooner we get it, the better. We’ll tell ‘em that at 70.5 it optimably lubricates the economy, invigorates employment of their kids. Stuff like that. That “kid†argument always wets their eyes and unzips their wallets.
The lack of choice in Social Security I can almost understand since there’s a governmental component in the benefits. But this accumulated IRA hoard is totally mine. Why do we allow such infringement on our liberty?
{ 16 comments }
Ok, first you have the employer witholdings and then social security. After that there are IRA’s, Kugroth plans, Roth IRA’s, medical savings accounts, tax refunds, and itemized deductions. Well, all of these have one thing in common: they are hoops. That is, they are designed to keep you buisy jumping thru them so you stay on the leash.
People would be better off skipping the tax free plans, and having money (offshore?) that is not accessable or known about. It’s important for people to understand that it’s not about money, but control. The government already has the treasury and the fed. Besides, what is the government going to do about it – hunt you down and ruin your life? That’s what they do to the people who comply anyhow.
Can you please define your terms, to prevent your post being so impenetrably US-centric? I know you can’t be referring to the Irish Republican Army, which is what most people understand by “IRA”.
P.M. Lawrence,
I don’t know how many people think of the Irish Republican Army when they see the phrase “take your IRA, for example.” That is, unless there are many with a personal Irish Republican Army (and who hasn’t wished for one at some point or another?)
Also, please note the very next thing following it: “your savings for that stormy day when your earnings equal your bar bill – not including chips.”
No need to get indignant; Roberts did exactly what you asked for, before you asked for it.
David C,
I feel compelled to offer contrary advice to what you’ve given…
It is very difficult to put your money someplace the US government won’t know about it. If you want to participate in the stock-market or the bond-market, or in any derivatives markets, you will have to go through a financial institution, and they’re required to engage in reporting.
If you go offshore, you are going to pay for that in higher expenses. Some investments aren’t reported to the govenrment, but these should not comprise the entireity of one’s portfolio. Most places that you buy / sell gold, silver, platinum, etc from and to aren’t required to report such. You could also invest in stamps, rare coins, and paintings; in fact, there’s some evidence that rare coin investment can be profitable (if done properly). However, all of these investments are highly illiquid. Furthermore, they require either being an expert one’s self, or having expert opinion. Every rare coin is different from every other rare coin. Furthermore, the bid-ask spread for these kinds of things is going to be high. While these types of investments should comprise a part of one’s portfolio, they certainly shouldn’t be all of one’s retirement portfolio.
401(k)s, IRAs, Roth IRAs, and HSAs may indeed be characterized as “hoops”. They definately require some knowledge on the part of the individual as to their advantages, and how to take advantage of them. And of course, there are risks associated with them regarding possible reneges on the part of the government. It’s for the individual to decide how likely that is.
I’ve never got the attitude among some libertarians that when something comes along that offers more choice to individuals than they had before, that’d a “bad thing”. Sure, it would be better if there weren’t restrictions on these retirement plans. But it’s better that we have these partial improvements than none at all.
Mises once said something along the lines of that we should be thankful for the loopholes that we have, for they are why we still have a somewhat free economy.
DJH,
Take it easy with this: “Most places that you buy / sell gold, silver, platinum, etc from and to aren’t required to report such.”–If your are referring to such as those that are domiciled in the U.S., dial up your personal copy of the USA Patriot Act–Therein, you’ll readily note the dramatically lowered levels of transaction values that “require reporting” to the Stadt.
This: “there are risks associated with them regarding possible reneges on the part of the government.”–though, in my view, should be well contemplated.
M E Hoffer,
Thanks for the reply…
To my understanding, it is financial institutions — e.g., brokerage firms like Fidelity and Vanguard, and banks — which are required to report financial transactions to the State.
The last time I bought physical bullion, the store I bought it from did not have to report it (indeed, they didn’t even ask for enough information which would allow such; I paid in cash). Furthermore, I also had a pool account with Kitco.com, and called them up about it. They said that as they’re not a financial institution, they aren’t required to report my buying and selling of gold or other bullion.
DJH,
Briefly, From: http://www.ictaonline.org/about.html
USA PATRIOT ACT
CASH REPORTING/ANTI-MONEY LAUNDERING REGULATIONS
The rare coin/currency/precious metals industry is unique in that it is the only profession that buys and sells coins and currency as merchandise, not cash. The USA PATRIOT Act specifically targets coin dealers in certain sections of this anti-terrorism law. ICTA has worked with US Treasury on the unique aspects of our industry and has negotiated reasonable compliance regulations that will satisfy Treasury’s anti-terrorism requirements while not being overly burdensome for coin/precious metals dealers. ICTA has developed excellent contacts within Treasury that assist us with clarification on specific points of the PATRIOT Act and other aspects of the cash reporting/anti-money laundering laws that impact our industry. Proper and timely compliance with the USA PATRIOT Act and other cash reporting/anti-money laundering regulations is extremely important. Ignorance of the law is not a defense and can result in calamitous financial penalties and even prison terms.
“Ignorance of the law is not a defense and can result in calamitous financial penalties and even prison terms.”
add’l: “The USA PATRIOT Act redefined the Money Laundering Act so that financial institutions include bullion dealers, credit card issuers, car dealerships,jewelers, casinos and virtually any business that extends consumer credit or trades in highly liquid commodities like diamonds, gold, cash and automobiles.”
And, the ever growing crop of Rat Chow: “The Secretary of Treasury may pay a 25% reward to informants of suspicious money transaction with a maximum reward of $150,000.”
P.M., No I meant Individual Retirement Accounts – savings that accumulate on a tax deferred status – until you’re 70 and a half years of age. At that point you must begin withdrawing the money. And the govt taxes it as ordinary incomel. My simple point is my lack of freedom as to when I withdraw it and incur the tax burden. regards, ted
IRAs are a terrible investment for anyone planning to live comfortably off of their investments. They don’t allow early retirement without a penalty and they are taxed at a greater rate than capital gains.
IRA problems:
When taxes rise due to babyboomer’s retirement, will pay higher taxes at withdrawl than when deferred going into account.
1) Taxed at ordinary income tax rates
2) Controlled by the government who can change the rules any time they need more money
3) Cannot claim losses inside qualified accounts
4) Cannot withdraw and redeposit funds into an IRA
5) Promotes the use of Term Insurance
6) No self completion in the event of a permanent disability
7) No death benefits if die prematurely
9) Taxes are not saved in qualified plans, only deferred.
10) After age 55 or so, it makes no economic sense to contribute to qualified plans as it takes decades to get exponential growth on the money.
M.E. Hoffer,
Thanks for the reference. That is pretty atrocious; but apparently, most gold-dealers aren’t aware of it.
K. Moran,
Thanks for your insightful comments regarding the drawbacks of Traditional IRAs (which also apply to 401(k)’).
First, I’d note that I would never suggest anyone use a Traditional IRA over a Roth IRA. However, for many, certainly 401(k)’s are good ideas at least up to the point of employer-matching (thereafter maxing out Roth contribs, and then only after getting employer-match and maxing out Roth contribs, investing more in a 401(k)).
While some of the problems you pointed out with Traditional IRAs are indeed true, they need to be weighed against the benefits, none of which you are considering.
The benefit of an IRA — or 401(k), 403(b) or 457 plan — is that they defer taxes. This reduces you current taxable income, which is beneficial for several reasons: (1) More money available right now for whatever you may deem important, which may include additional investment; (2) Your lowered AGI may allow you additional tax benefits — such as ability to contribute to a Roth IRA — that wouldn’t be available to you if you had a higher AGI; (3) The deferral of taxes on your money allows you money to grow at a faster compound rate, which over time, will be beneficial, even if the money is eventually taxed at a higher rate than the capital gains tax rate; (4) Particularly if you are paying more taxes now than you expect to pay when you retire, deferred tax plans make sense; (5) If your MAGI is below $100k, you can roll over a Traditional IRA to a Roth IRA, which results in tax-free (not deferred) gains thereafter.
Of course, I recommend (almost universally for people with long time-horizons) a Roth IRA over a Traditional IRA. However, one should of course first max out employer contributions in their 401(k); you can’t pass up the opportunity to get that money at your employer’s expense.
Now, in light of that, responding to your noted problems…
“1) Taxed at ordinary income tax rates”
Which, as I explained — though not as beneficial as treatment of Roth gains, which aren’t taxed — can still be beneficial if either you are in a high tax-bracket currently, or have a long time-horizon, or a combination of the both. And moving away from Trad. IRAs to 401(k)’s, contributing there can be especially beneficial, as you can contribute much more to a 401(k). Furthermore, with 401(k)’s after you leave your current employer (or when retiring), you can rollover the amount to a Traditional IRA, which can then be converted to a Roth IRA (you’ll have to pay taxes on the conversion, either out of taxable accounts or the IRA). You then get the benefits of a Roth IRA.
“2) Controlled by the government who can change the rules any time they need more money”
Granted. That’s a risk investors have to analyze and consider themselves. It can be amelioriated by keeping an eye on the situation, and being ready to take pre-emptive action if you deem such is very likely. However, note, there are also risks of non “government controlled” things as well: firstly, they may be more controlled by the government in the future. Secondly, to some extent, they may already be conrolled, or reported (see earlier in this thread regarding gold dealers).
“3) Cannot claim losses inside qualified accounts”
No, you can’t, because you deferred taxes on 401(k) or Traditional IRA contributions. However, the long-term benefits probably outweigh this. Besides, when talking about your retirement horizon, you shouldn’t have the mentality of losing money year-after-year.
“4) Cannot withdraw and redeposit funds into an IRA”
No, not for Traditional IRAs. A consideration individuals need to decide.
“5) Promotes the use of Term Insurance”
Can you explain how Traditional IRAs (and presumeably 401(k)s) promote the use of term life insurnace?
“6) No self completion in the event of a permanent disability”
Do you mean here, that if you get disabled, contribs aren’t made on behalf of you?
I suppose one could buy insurance for this sort of thing, if such exists, or make a special arrangement with an insurance company.
“7) No death benefits if die prematurely”
Correct. IRAs are tax-advantaged savings vehicles, not annuities or life-insurance plans. You can, however, hold an annuity within an IRA. However, annuities have high expenses, and they provide no additional tax-benefit inside an already tax-benefitted account. I don’t think you can buy life insurance within an IRA or Roth IRA, but am not sure.
“8) When taxes rise due to babyboomer’s retirement, will pay higher taxes at withdrawl than when deferred going into account.”
A risk you have to decide upon. A few notes: (1) In 2006 and 2007, for those over 70.5, they can donate money directly to a charitable institution from their 401(k), avoiding taxes on it; (2) If your AGI is currently under 100k, you can rollover a 401(k) to a Trad. IRA when you change jobs or retire; you can then convert that to a Roth IRA, paying taxes on the conversion as income, and then reap the benefits of the Roth IRA; for 2008 and beyond, you can convert directly from a 401(k) to a Roth IRA; (3) For 2010 and beyoond, the income limitation on conversion will be eliminated.
“9) Taxes are not saved in qualified plans, only deferred.”
True. And if you can’t take the deferral, and have to characterize the contribution as qualified, it is much less beneficial.
“10) After age 55 or so, it makes no economic sense to contribute to qualified plans as it takes decades to get exponential growth on the money.”
It is less beneficial the older you get, but that doesn’t necessarily mean it isn’t beneficial. It will depend on how high your taxes are at the time vs. how high you expect them to be when you retire, how long your time-horizon is, and if you will be able to convert to a Roth IRA for tax-free growth for a long time-horizon. I plan on living to 120, so at 55, I’ll only be half dead. I think people should take that outlook: don’t plan on dying early.
Hope this has been helpful.
Oh yea, the Motley Fool has a helpful article on some of the pros / cons of 401(k)s.
K, thanks for your comments. No doubt about the tax deferral benefits of the IRA. Thats about the only benefit. Even that is dubious depending on how the money is invested (All withdrawals as you know are taxed as ordinary income. Not great.) And I agree that in most cases the Roth is a wiser choice. I just wanted to make the sardonic (can I use that word?) point that I should have the freedom to take the money when I want it – not the gov. Why would the legislation give them that priviledge with MY money, regards, ted
The only actual advantage to tax deferred plans is the elimination of lost opportunity costs on taxes that would be incurred in a taxable account.
Another method that should be considered is by using the velocity of money multiplier concept, not keeping money in any one thing too long,(compound interest= compound tax) moving money through a series of financial products in order to pick up the additional benefits of protection( premature death, disability, lawsuit protection, access to your money, tax and opportunity cost recapture). Through this process one not only has more protection throughout their life, but will have more money in the end. This being the case one would also have a richer retirement.
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