The following email I received hit on a hot topic that I have discussed on several occasions; but warrants another warning.

Hello, I’ve been enjoying your site the past few weeks after I stumbled upon it. I think I originally hit it when reading up on the impending doom of Social Security.

I live in Northern CA (Bay Area), married with 1 child and another on the way. I’m 35, so still planning on at least 20 yrs until “retirement.”

I bring that up, b/c I’ve recently come to the conclusion that my 401(k), while not a bad deal, is a sweet tax “scam” for the govt if I continue building on a nice nestegg…i.e. all these tax “savings” on pre-tax contributions will be quickly wiped out by taxes during the distribution years. So I’ve been thinking that although the Roth isn’t perfect, I’d be better off only doing 401k up to max of employer match, then going other after-tax routes, particularly the Roth.

But you do raise some concerns re: Roth. With that being the case, are you a proponent of retirement vehicles like annuities, or various whole life products?

Just curious…and again, I enjoy your site.

Regards,

My Reply:

I’m glad you are finding my websites useful.

I’m afraid that advising on the best retirement savings vehicles is far too personalized a task to be able to be accomplished in this forum. You do need to work with an objective (not receiving a commission on product sales) financial advisor who can evaluate your family’s needs and situation to come up with the best plan to meet your needs. Each type of retirement product has its own pros and cons to balance out.

While Roth IRAs are fine as just one part of an overall retirement plan, putting everything into them would be very foolish. My initial concerns from when the Roth IRAs were first enacted remain the same. Deferring current tax deductions – or worse still, paying actual taxes on IRA conversions – based on the promise of free pay-outs decades down the road is too much of a gamble for me to feel safe with.

Believing that our exalted rulers in DC will not tinker with that rule between now and when you retire is very naive. Maybe for those who are already in their late 50s or early 60s, that isn’t as big of a risk. However, if for anyone younger than 50, I would be very careful trusting that you will ever see completely tax free Roth IRA benefits. I cringe every time I see someone set up a Roth IRA account for a very young child.

I hate to sound like a broken record, but the Social Security system was originally founded with the exact same premise. No deductions were allowed for the payments in, based on the promise of completely tax free benefits later on. As you may know, that was changed by our rulers with no regard for fairness and we currently have Social Security recipients paying Federal income tax on 85% of the benefits they receive, if they qualify as “evil rich” in the eyes of our masters in DC. Since that definition was set as any single person earning over $25,000 per year or married couple earning over $32,000 per year, a lot of evil rich people pay taxes on what was supposed to be tax free income.

My prediction is that there will be a similar “means test” established for owners of Roth IRA accounts, where benefits will be taxed for those qualifying as evil rich, a favorite target of our rulers.

I obviously don’t have a crystal ball and do hope that I am wrong in this prediction; but past behavior by our rulers in DC leads me to no other conclusion.

Good luck in setting up your retirement plans.

Kerry Kerstetter

Deficit declines $100 billion – From Jack Kemp. People keep forgetting that deficit and surplus predictions are nothing more than WAGs (wild ass guesses) and really mean nothing. As I’ve said on too many occasion, the supposed Clinton surpluses were nothing more than pie in the sky forecasts based on the assumptions of no more economic downturns ever and a double-digit increase in the stock market for all eternity. Anyone who considers any predicted budget figures to be anything close to reliable is crazy.

Social Security Gets 2.7 Percent Boost – This could end up in a net loss for SS recipients because of the increased Medicare premiums that will be deducted, as well as the income tax on 85% of the full benefits (before Medicare deductions).

sKerry says the presidential election will decide the fate of Social Security – This may very well be true; but not in the way that Lurch means. If anyone’s plans will destroy the Social Security program, it is the DemonRats’.

COURT STOPS FRAUDULENT TAX-RETURN PREPARER. Norfolk Preparer Used Sham Trusts to Claim Improper Deductions

L.A.’s Scary ‘Cop Tax’ Campaign Angers Critics – Different groups use different tactics to encourage new taxes.

Social Security Increase Announced – Not receiving as much publicity as the increased benefits is this bit of news:

The Social Security Administration also announced Tuesday that 9.9 million workers will face higher taxes next year because the maximum amount of Social Security earnings subject to the payroll tax will rise from $87,900 to $90,000. In all, an estimated 159 million workers will pay Social Security taxes next year.

People forget that the Social Security system is set up as a Ponzi Scheme, where all benefits being paid out come from the pockets of current workers. Higher benefits = higher taxes.