This last weekend I was helping my mother roll her 401K into an IRA when I learned something rather disgusting. Many people of retirement age probably already know this but I am a young guy at 38 so I don't think too much about retirement yet. Anyway, when you reach age 70.5 you have to start drawing money out of your retirement accounts. This I knew. What I did not know was the method the government uses to determine how much you need to draw out. They estimate when you are going to die and create a schedule of withdrawals so your account balance will be 0 on that magic date. Is it me, or is there is something wrong with a government estimating how long you will live in order to extract as much tax money as possible before you die.
I used to think 401Ks were great. Stick with me, this is not going to be a finance column. I have been putting money into mine since I was in my twenties. I used to think it was wonderful, I get to save this money, reduce my income taxes, and I don't have to pay any taxes on it until I withdraw it. The last few years however, I have come to view it as a trap, a prison for my money. I put money in because the company I work for matches contributions so not doing so is like leaving money on the table. But that money is then held hostage. I can't take it out without paying penalties or borrowing my own money and paying interest. Worse yet, I have no idea what the income tax rate will be when I do take it out but I bet it will be higher than it is now, much higher. According to the Social Security Administration the "trust fund" will only be able to cover 75% of its benefits by 2041. Add to that Medicare possibly running out of money in 2020 and you would have to believe the government is going to be pretty desperate for cash long before I can start making withdrawals from my 401k. The government is going to be looking at my big fat 401k like a hungry lion looking at a juicy steak.
Now, you can argue that the Roth 401k addresses the concerns about income tax on withdrawal and it does. The problem is that it is still the government telling you what to do with your money. You can draw out the principle after 5 years I believe but there are restrictions on withdrawing the capital gains until 59.5 as I understand it. Also you have to invest post tax dollars which many people will have a harder time doing.
Lately, all I hear is scaremongering about the economy. The housing bubble, the prime rate crisis, the weak dollar. A number of financial "experts" are predicting a recession, or a depression. I don't buy into it but what if? What if I lost my job? What if there were no jobs and things got real tight? I mean real tight as in selling things to buy food? I've got a decent (by my standards) chunk of change sitting there that I can't tap into without losing a significant portion of it. Most people have money in retirement accounts and very little liquid savings and you know why? Liquid savings is EXPENSIVE. You have to pay income tax on that money just so you can have it in your savings account. That means social security tax, federal income tax, state tax and in my case city tax and 15% a year in capital gains on any investment returns. So the savings people do have is tied up in retirement accounts that are difficult to get at. I am not saying its a good idea to tap into your retirement willy nilly but if a depression were to hit along the lines of 1929 where are the reserves going to come from to keep people afloat?
And don't get me started on the taxing the rich nonsense. The rich don't get taxed the way the people trying to get rich are taxed. The rich don't have income for the most part, they have capital gains. You don't pay social security tax on capital gains and the current long term capital gains rate is 15%. In many cases there are no capital gains if you invest in tax free instruments such as municipal bonds. The really rich don't have to jump through the hoops that we do trying to become rich. They don't care what the income tax rate is, and they have access to their money while the rest of us have to lock our money up so we can't get to it even if we need to. The highest income tax bracket is 35% in addition to 6.2% in social security tax on the first 100K (actually 12.4% counting the employers portion) so if you are upper middle class working your ass off making say 250K a year you get soaked. If you are Warren Buffet, not so much. The rich people in this country put up roadblocks to becoming rich and tell lies about taxing the rich to help the poor. If you want to help everyone, eliminate capital gains and decrease the income tax so people can save for retirement in a way that allows them to control and access their money as needed.
And Uncle Sam wants to make sure I pay all the tax they can squeeze out of me before I shuffle off this mortal coil. So when I turn 70.5 they will send me a letter telling me when they expect me to die. At least when I reach 70.5 the age should be higher than it is now. I wonder, will they consider me irresponsible if I don't oblige and drop dead on time? I mean, I will no longer be paying income tax on my 401k withdrawals and God help us if we have universal health care where the state will view me as a drain on their resources at that point.
The point of all this is that we don't have the freedom to manage our own money. Taxes have become so predatory that we have to protect ourselves from them and in doing so we put our finances in a straight jacket. Imagine what this country would be like if capital could flow freely. We could invest for retirement and have access to our money for real emergencies. There would be a buffer for economic downturns.
Its my money, my life and when I will die is none of the government's business.