Another Case for Tax Profile Diversification
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.
6 responses to “Another Case for Tax Profile Diversification”
My Financial Journey responds:
Posted: February 28th, 2007 at 9:06 am
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.
Lazy Man and Money responds:
Posted: March 5th, 2007 at 7:42 pm
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.
» Six Roth IRA and 401K Questions Everyone Asks on Blueprint for Financial Prosperity responds:
Posted: July 30th, 2007 at 10:46 am
[...] is a powerful tool but not as powerful as free money (the match). This also has the added bonus of diversifying the tax burden of your retirement assets. So, get the match, max the Roth, then go back to the [...]
How To Decide Between Roth IRA or Traditional IRA? :: My Retirement Blog responds:
Posted: November 22nd, 2007 at 9:16 am
[...] the answer is yes, then I’d go with a Roth IRA from the perspective of tax profile diversification. In a nutshell, tax profile diversification means you shouldn’t have all your retirement [...]
Rollover Your 401(k) Directly Into Roth IRA :: My Retirement Blog responds:
Posted: January 17th, 2008 at 6:18 am
[...] before you jump at the opportunity to convert everything over to a Roth, I would investigate your tax diversification profile because having all your retirement assets in tax-free is just as bad as having all of your assets [...]
Roth IRA Explained » Roth IRA or Traditional IRA? responds:
Posted: April 24th, 2008 at 8:49 am
[...] IRA contributions. Even if I could, I still would pick a Roth IRA because I would rather diversify my tax profile and put $15,500 (or less) tax-deferred in a 401(k) and then $5,000 tax-free in a Roth [...]