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Another Case for Tax Profile Diversification
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I wrote about how we’ve been lucky to experience a period of exceptionally low tax rates, likely helping the prosperity we’ve experience because people have more money to spend, in the past when I took a look at the historical top marginal tax rate a few weeks ago. Well, yesterday Pat Regnier did the same in a piece called the Great Tax Hike in which he argues that we’re likely going to see an increase in our taxes as we try to figure out how we’re going to deal with the Social Security shortfall, increased spending on Medicare, servicing the national debt, and a host of other issues. Now, the big twist, which I mentioned in my Devil’s Advocate post against Roth IRAs, is that some of these tax hikes could come by way of a consumption tax, an added tax on the things you buy, and so the Roth IRA wouldn’t protect you against that.
So, what does this mean? Since none of us can see the future, we should all diversify your retirement asset tax profile to make sure we aren’t caught going one way or the other.
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Maybe it will be a blessing in disguise that my new employer does not offer a Roth 401k, going to force me to be diversified, although in the case of a consumption tax you are just as screwed with a traditional account as that money will first be taxed at your income tax level and then the money will again be taxed when you consume something so either way you are screwed unless they do away with the income tax entirely in favor of the consumption tax.
I’ve always thought that we should have diversified taxes profiles as well, but it’s odd that the limits for 401Ks are nearly 4 times the limit of Roth IRAs. These should definitely be closer to equal. Maybe with the Roth 401Ks it would give me an option to be truly diversified.
It’s unfortunately there’s not really a good way to play it. It’s basically like putting half of you money on heads and half you money on tails and flipping a coin. Even if you mess up and put 75% of your money on heads, this “mistake” could work out in your favor.