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eorStarting Jan. 1 the government will allow Americans to invest in a new Roth 401(k).
The traditional 401(k) allows you to avoid income tax now on money you invest based on the theory that when you are retired you will be in a lower income bracket so you'll be taxed less. It also allows you to earn interest on the full amount, not just the after tax portion. This is a good thing if you believe your percentage of taxes will actually be smaller after you retire.
The new Roth 401(k) is just the opposite. The Roth version allows you to pay taxes on the money now, then that money and all interest on that money earned in the future is tax free. You take the hit now when you have sufficient income to absorb the tax loss then you don't have to take the hit in the future when you're retired and have less income. This looks even better if you believe that taxes are going to go up.
Now is this just the benevolent gift of an informed government? Is it just intended to allow those who can understand that taxes will have to go up in the future plan wisely? No. It's another version of the shell game that will make that increase in taxes inevitable. This is a way for the government to increase immediate income in exchange for sacrificing future income. This is more of the government's 'borrow from tomorrow in order to be able to spend on credit today' policy.
Let's put another couple tons of explosives on the ticking timebomb that is US government deficit.
The sad thing is that for the average ordinary American the Roth 401(k) is probably the best bet. You're betting that in the future taxes will go up, services will be cut, and we'll have to start paying our bills. So by doing what is in your best personal fiscal interest you're allowing the government to perpetuate policies that aren't in your personal fiscal interest. Someone really clever came up with this version of the shell game.
The traditional 401(k) allows you to avoid income tax now on money you invest based on the theory that when you are retired you will be in a lower income bracket so you'll be taxed less. It also allows you to earn interest on the full amount, not just the after tax portion. This is a good thing if you believe your percentage of taxes will actually be smaller after you retire.
The new Roth 401(k) is just the opposite. The Roth version allows you to pay taxes on the money now, then that money and all interest on that money earned in the future is tax free. You take the hit now when you have sufficient income to absorb the tax loss then you don't have to take the hit in the future when you're retired and have less income. This looks even better if you believe that taxes are going to go up.
Now is this just the benevolent gift of an informed government? Is it just intended to allow those who can understand that taxes will have to go up in the future plan wisely? No. It's another version of the shell game that will make that increase in taxes inevitable. This is a way for the government to increase immediate income in exchange for sacrificing future income. This is more of the government's 'borrow from tomorrow in order to be able to spend on credit today' policy.
Let's put another couple tons of explosives on the ticking timebomb that is US government deficit.
The sad thing is that for the average ordinary American the Roth 401(k) is probably the best bet. You're betting that in the future taxes will go up, services will be cut, and we'll have to start paying our bills. So by doing what is in your best personal fiscal interest you're allowing the government to perpetuate policies that aren't in your personal fiscal interest. Someone really clever came up with this version of the shell game.
