Glad to have Max chime in on this :)
NEWMAN! said, among other things:
> The first inequality is that tax deductions are worth more to
> wealthy people in higher tax brackets. Here's the math on a $30,000
yearly
> contribution to a 401K (the maximum allowed between employee and employer
contributions).
-?? Maximum is $10,500 a year right now. It increases to $15,000 by 2006. -There's a bit more for old folks nearing retirement. Nowhere near $30K.
The $10,500 is the maximum employee contribution. Employers can raise it to $30,000 with their contributions. The total employee plus employer contribution will rise to $40,000 in 2006.
>??? How can that (a worker with a pension being worse off because
>she used the tax break) happen? Got a cite?
See http://www.esplanner.com/Download/401kfinal.PDF Part of the explanation is going in at a low tax rate and getting taxed at a higher rate but a big part is the fact that increasing your investment income at the middle range is less lucrative than for rich folks because of increased taxation of social security benefits. But check out the economic study.
>The difference here is not as great as you imagine. Under Roth
>treatment there is still a tax. You can't just ignore the requirement
>of using after-tax dollars in comparing it to a regular IRA/401K.
>The determination of whether Roth or not-Roth are more
>lucrative for a taxpayer is actually pretty complicated.
It is somewhat complicated, but over a lifetime, there is little debate that the Roth is a better deal. Only older workers really have much of a debate on the issue, as far as I can tell from all the investment advice.
>Under
> the exponential math of compound interest, those grandchildren could each
> enjoy by some estimates as much as $50-100 million of tax-free income over
> their lives from these Roth 401K bequests.
-They could get the income, but they couldn't enjoy it, since whatever -they spend stops accumulating interest. Unless you count enjoyment -as dying rich.
Since they are only consuming a tiny slice each year, that leaves plenty to accumulate for the rest of their life. Admittedly, they end up with far more if they back-load their consumption of the IRA funds.
> Before that day comes, we need to stop the Roth program and end the $330
> billion 401K boondoggle for the wealthy.
-Over the violent objections of more than a few trade unions, not
-incidentally.
Not that many- a few are negotiating 401Ks but ending that tax break would make the deduction for regular pensions that much more attractive again, something most unions would prefer.
>One fun problem is the transition. What do you do with all the
>people who have already taken deductions? Make them cough
>up the money now?
Probably simplest to leave currently vested benefits alone and replace it with a new retirement benefit that is more attractive to 90% of workers-- I mentioned a flat increase in Social Security benefits, but it could be done in the form of the Clinton-like USA accounts were each workers gets something like $500 automatically put in a personal retirement account each year. Absolutely progressive since everyone gets the same amount each year.
-- Nathan Newman