Braineack

iTrader: (62)

timely discussion. obama wants to discorage retirement savings accounts by taxing ones over a certain amount.



mod note: this thread split off to clean up the Ramble thread.
- Perez

blaen99

iTrader: (6)

Could the political discussion please be taken to politics?

sixshooter

iTrader: (12)

Stupid fuckerr.

Joe Perez

iTrader: (8)

All they are talking about doing is treating defined-contribution accounts in a similar manner to which defined-distribution accounts.

At present, defined-distribution accounts are structured so that amounts over $205,000 per year are subject to taxation.

The proposal is to cap the amount which can be deposited tax-free into a defined-contribution account to $3.4 million. Once you hit that cap, you'd need to start paying taxes on the money.

This doesn't seem terribly unreasonable to me. I doubt that anyone is actually going to be discouraged from saving for retirement. If you happen to be one of the folks with more than $3.4 million in your retirement savings account, then you have my deepest sympathy.

Braineack

iTrader: (62)

I'm going to live to like 102, im going to need 3.4 million just to pay for gas for a few years.

y8s

iTrader: (8)

hoverounds dont require gas.

Joe Perez

iTrader: (8)

Neither does this:



Admittedly, it's limited to only 740 HP and 740 ft/lbs in this version, so it only outperforms the gas version by about 20% in terms of raw power. It is slightly heavier, though, which eats up some of that performance advantage.

sixshooter

iTrader: (12)

Thank you.

fooger03

iTrader: (2)

I'm taxed when I "earn" money, and I'm taxed when I "spend" money. Taxing me for "saving" money should be illegal. There will be plenty of people with $3.4 million in savings who can no longer contribute to their savings account because they will be taxed annually more money than they can afford to contribute - all their contributions will be going towards paying for a "maintenance" tax.

Unreported overseas accounts anyone?

Braineack

iTrader: (62)

i actually believe the reasoning behind the tax would be to stop employers from giving large sums of money into retirement saving plans instead of paying salary.

hustler

iTrader: (6)

Still reeks of double taxation.

Ryan_G

iTrader: (8)

That is not how the limit works.

If you really are approaching that limit in your 401k you can choose from one of the many other ways to shelter your income from the govt for retirement like life insurance policies that have cash values or allow you to take out loans against the policy that are paid back on your death (all of this is tax free btw). This is just a political move that will have no real effect on anyone in that bracket with half a brain.

Joe Perez

iTrader: (8)

I think you may be misinterpreting the law- there is no triple taxing going on here.

At present, you are NOT taxed when you "earn" money, if you subsequently deposit that money into a defined-contribution account such as an IRA or a 401k. That's kind of the whole point of these accounts- they allow you to defer paying the tax on the income until a future date, presumably after you have retired and are drawing income at a lower-than-present level.

The change would be to limit the maximum amount of money which you can hoard into such an account to $3.4 million.

At the point where you have put $3.4m worth of tax-free money into your account, then you have to stop using that particular tax shelter and pay income tax on the money now rather than later.

fooger03

iTrader: (2)

Yep, looks like I did indeed misunderstand - but now you've all cleared it up:

Rob tomorrow to pay for today!!!

I'm still interested in learning how Obama is going to ask the net benefactors of society to pay for their fair share...

thenuge26

iTrader: (2)

If you have already put 3.4 million into your retirement account this year, something tells me you aren't going to have much of a problem come retirement.

Fathom55

Pish-posh and hogwash my good man!

No but seriously, here's my take on it. Mock interview time!

What's that defined-distribution account Joe's talking about?
Currently "defined-distribution" accounts are earned as a benefit, rather than a form of compensation. Yes, people are taxed at amounts withdrawn beyond $205k per annum, but the owners have not yeilded an opportunity cost in return (or if they do it is a defined contribution amount and a defined withdrawal amount). It is not difficult to make the argument that lavish pensions are unearned (*cough* *cough* politicians).

The retirement accounts in question here, however, are funded primarily by the account owner, perhaps with some employer matching. The account owner forgoes spending the money today to save and hopefully grow the money for tomorrow. Thus, the owner yeilds an opportunity cost to better himself for the future.

But wait just one second, what if the guy makes $5,000,000 per year and wants to shelter a whole bunch of it in his 401k/IRA? He gets to dodge taxes and compound that money for years! That's not fair.
Yeah, they thought of that. The cap on 401k contributions is $17,500 per year. IRA contribution caps are considerably less.

So let's do some math.

At $17,500 per year, how long would it take you to achieve the Obama cap?
Roughly 194 years. Account owners, however, can achieve the $3.4MM number due to the forces of compound interest.

How does that work?
A long time ago, people realized that no one was going to take risks with their money if they didn't receive some form of compensation for it. In order to entice people to provide them with capital, businesses agreed to offer up annual interest payments, equity interest in the business, or a little of both. This is the fundamental driving force behind our stock and bond markets. People invest their retirement account capital into the market (or pay someone an exorbitant amount to do it for them). In exchange they receive shares of the company. With some luck, the company does well, generates cash flow, reinvests that cash flow in itself and earns more money on those investments! Thus, it compounds its earning power and, in theory at least, the value of your shares compound with it.

I don't understand what this has to do with Obama's cap...
I didn't think you would, Mr. Italics Man. The point is, in order to achieve the lofty $3.4MM level, the account holder had to take RISK. It is utterly preposterous to expect someone to take risk and see their reward completely taxed away. What will people do to react if this legislation is passed? They'll do a few things.

First, this completely annihilates the incentive for retirement account saving when people young. If your compounding investments are successful and hit the tax cap, say, in your early 50's, you are literally going to see all future gains in the account taxed away. But wait? What if you lose money? Oh, you get to suffer 100% of the downside for that too. In other words, capped accounts will go straight to "cash" and just sit there and de-value in real dollar terms. Useless. A little word on the power of compound interest. Consider for a moment, that if your parents had dropped $10k into a ROTH retirement account when you were 15 and dropped $100 per month in each month thereafter (and you obviously continued this rather than being a giant mooch)...when you hit 65 years old that account should be worth somewhere in the neighborhood of $3.2MM. That's without big contributions on your part. So with this rule, forget pre-tax saving when you're young.

Second you end up with this kind of gray area capital that sits in retirement accounts that have already hit the cap, but cannot yet be withdrawn. The owners are not going to invest the money (take risk) only to see the government take the return. So what happens? It sits in some kind of terrible CPI adjusted (oh...the government controls that too btw) fund that just keeps ahead of inflation...as defined by your government. That is a HORRENDOUS use of capital that provides no benefit to the economy.

You've been pretty restrained politically, here. Do you want to go on a really quick diatribe?
Yes, I do..thanks. This concept is absolute bullshit. It is punitive to those who save and take risks with their money. The background concept here is that no one "needs" more than $3.4MM in a retirement account. Says who? And furthermore, since when am I limited to my "needs"? What if I want more? What then? Is that okay? Or is occupy wall street going to camp outside my house and smoke weed?. Wanting to be financially successfuly does not make one Gordon Gecko.

This flies in the face of the whole purpose of the preferential tax treatment retirement accounts in the first place...which was to get people to SAVE MONEY AND BE SELF-SUFFICIENT WHEN THEY GROW OLD. Think for a minute about how much money $3.4MM REALLY is. It's a ton to someone in their mid-20's. It certainly isn't to someone who is facing 20+ years of retirement and a degenerating body. What happens if they get sick? How much does cancer cost? Oh, but then they MUST have insurance right? Well now that they have to... another "says who" moment...

This goes beyong a left vs. right argument. This is a matter of who is entitled to the money that I earn, save, and invest. The statement coming from the Administration is that I'm entitled to some of it...to a point...but then no more than that. Why not extend this to brokerage accounts? Savings accounts? Lest we forget Obama's Greek brethren in socialism?

And to what point and purpose? This isn't going raise much revenue at all. Is this just a gesture that he can point to and stimulate the greed-haters among his supporters? I just don't get it.

Bottomline... in a country with a bankrupt social security system and an aging populace, discouraging ANYONE from saving in ANYWAY is an extremely stupid move.

I'm done.

Braineack

iTrader: (62)

But Obama's pension would be exempt, much would some others with political power/ties.

Scrappy Jack

iTrader: (2)

Overall good analysis and explanation. I agree with pretty much everything you wrote, as I understand the proposal, except the last point in bold.

You are relatively new around here so may not recognize me as That Guy. If you feel like bounding down a rabbit hole, go check out the "Let's Bore Each Other To Death" thread.


There is this collective notion of potential government insolvency and that Federal fiscal deficits of any size are always and ever a bad thing. Both "sides of the aisle" agree that it "must be dealt with." This is unproductive at best and harmful to all sorts of people at its worst.




Braineack - Does Obama also want to "discorage" proper spelling and grammar?

Braineack

iTrader: (62)

yes, actually.

Fathom55

Ok I know what you mean with the government insolvency. It is theoretically impossible for a government that controls the supply of its currency to run out of that currency. Hence the reduction in the credit rating of US debt was not so much a statement of increased risk of default, but rather a warning of the recently increased risk of value destruction.

The same holds true for the social security system. There is little risk that the raw number of dollars won't be there. But the raw value that should be there....that's a very different analysis.

Sorry for the tremendously delayed response.