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Beware of Tax Deferred Accounts

Posted By Jim On 11/08/2005 @ 4:07 pm In Government,Investing,Personal Finance | 13 Comments

I, and many others, love the Roth IRA because your gains grow tax free. While the government could always change the rules and suddenly decide to tax your earnings, it’s very unlikely because the backlash would be murderous on a political career. With tax-deferred accounts, however, such as the ubiquitous 401(k), there is no guarantee that your marginal tax rate when you’re retirement eligible will be lower than it is now. If it’s higher, you really have no excuse, you knew the rules. Honestly, as a twenty-five year old, I believe the marginal tax rate will be much higher when I retire even if my income goes down. Here’s why…



1. The National Debt
It’s currently a “little” over 8 TRILLION DOLLARS. How have we been able to sustain such an enormous debt? Because countries like China and Japan are willing to buy our Treasury Bonds at the piddly interest rates. There will come a time when the United State will have to become very serious about paying back this debt and when that happens the money will come from one place – taxes. And where do the taxes come from? You, me, and the next poor schmoe.

2. National Health Care
Nearly every major economic power in the world has some form of nationalized health care, funded by taxpayers. It has been shown that the actual % of GDP spent on health care is lower in places with nationalized health care than in the United States and some have a longer lifespan, a nice side effect. In order to pay for nationalized health care, the money will come from taxes, and I believe it’s only a matter of time before the US implements it.

3. Social Security IOU’s
The government’s been spending and spending and it’s been sending IOU’s to cover the balance of the Social Security “lock-box.” Well, with the aging population will start needing their social security checks… the money to pay for the IOU’s will have to come from somewhere, the most obvious place would be with taxes.

I’m not a public policy expert or anything, I’m just a regular old schmo trying to decide whether I should max out my 401(k) contribution or just put in enough to get the maximum matching from my employer. I honestly believe that the tax rate will increase in the future, regardless of how much I plan to make (as if I could even plan 40 years into the future, let along 2). Anyone else have any thoughts on the matter?

401(k), Retirement, Social Security, National Debt


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