You could argue that people with higher incomes would pay a smaller proportion of their income as taxes, but this is beside the point--the only part of your income you can actually use is whatever you don't save or invest, and though you can just keep your savings and investments compounding indefinitely, you have absolutely no incentive to do so unless you are planning or anticipating for some future point in time where you or your heir withdraws and spends some of that money, which is exactly the point when that (typically much larger) sum turns back into taxable income.
We don't need _more_ accounts, just simplify the ones we have and consolidate.
One unfairness is people who have spiky incomes, like a guy who repeatedly builds companies & sells them off, 4 years on ramen & 1 big payoff -- it does seem unfair to put him in the tax bracket of those with 5 times his average income. I have an idea many countries would let him smooth this out already, but don't know the details.
If you were worried about say, frugal people with large amounts of generational wealth, you can also pair this with a big fat estate tax.
Example: 12% tax on a Bentley or Toyota, Yacht or toy boat, wealth advisor service or lottery ticket
In this case, the last decade of monetary policy has been about pushing people to find passive savings unattractive. Their dreams of generational wealth from merely having a savings account totally wrecked because their life span cannot withstand the paultry compounding interest at a fraction of a percent.
Therefore creating incentives like you have imagined would further be at odds with the goal of keeping the money supply circulating, instead of parked in passive accounts.
The point is to keep everyone desperate for returns and using their entire mind share to find the best returns. Amongst the winners and failures you have individuals throwing their money across asset classes and the entire planet, which allows for easy accounting of the money supply and high velocity.
IRAs (which should replace 401ks entirely)? Wage increases so workers can afford to save for retirement (and not need to raid their retirement accounts for emergencies)? Also seems like a submarine piece for annuities.
401ks are underwhelming as a product. Congress should provide IRAs the same creditor protection, allow employer contributions, and incentivize a streamlined onboarding process (just as you provide ACH routing and account number for your checking account rontour employer, you’d provide the same for your IRA). This ensures portability, low costs (lots of competition in the IRA space), and also prevents junk fees from 401k administrators since you’re not a captive audience.
Agreed. It wasn't too long ago that The Crash wiped-out a large portion of people's life-savings.
>Congress should provide IRAs the same creditor protection, allow employer contributions, and incentivize a streamlined onboarding process...
Couldn't agree more but what you're - essentially - describing is no different than the pensions as exists in Europe [1,2,3,4].
This isn't meant to be an affront but, for some reason, Americans have grown adverse to the idea of pensions; even though previous generations of Americans enjoyed the fruits of that very same labour.
 - https://www.cbsnews.com/news/retirement-dreams-disappear-wit...
 - https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-rel...
 - https://www.deutsche-rentenversicherung.de/Allgemein/en/Inha...
 - https://www.island.is/en/senior_years/pensions_and_benefits/...
 - https://www.pensionsmyndigheten.se/content/dam/pensionsmyndi...
I always thought that a pension was defined as:
"Contribute $A/month for X years, and we'll pay you $B/month for Y years after you retire - and don't worry about how it happens, you're guaranteed this money if you qualify."
Is that not how pensions in Europe work?
Work place pensions now are like investment accounts, except you have some degree of matching from the company and the government tops you up an extra 20% of what you contribute (it gets more complicated when you get into higher tax brackets, like getting 40% top up on portions, but getting it back by raising your untaxed income level instead of directly into the account. And very high earners it gets more complicated)
As an individual you can also open a SIPP which is a personal pension investment account, get all the government benefits but no company match of course.
And defined benefit pensions and 401k are invested into the same assets, the government doesn’t have a secret stash of risk free 8% return investments. What they do have is the ability to fudge the numbers by setting inappropriate assumptions and buying government employee votes with crazy promises 30 years into the future, backed by the power to tax everyone into oblivion.
This is never going to work. With so much people living check to check, who has the money to save? This approach supposes that we are hommo economicus able to take the best long-term decisions. We are not.
For me, the easy solution is tax people now to pay the retirement of older people. Then, do that forever. It works in Europe.
But, will this work with a diminish population? Is not this a pyramidal scheme?
The reality is that productivity has gone up way faster than population is going down. The main problem is how to distribute that enormous wealth, not if there is enough for everybody.
This isn't actually true for at least some parts of Europe. In fact, there are huge problems with current retirements systems and doubts of its future tenability precisely because of this scheme.
To have a functional society. Everybody has the mandatory duty to take care of the society they live in.
You have right, as you should. But is as fair to have duties. A society where everybody is entitled to rights but nobody wants to perform their duties is a sick society.
This benefits you in the end if a selfish reward is what you look for, by creating a better society your odds to have a good life are increased.
Tribes that have an every man for himself ethos don’t really work out in the long run. Turns out, working together and spreading risk over the tribe (or country) is more sustainable and productive, hence they thrive and have a competitive advantage.
We can’t even predict 2 years into the future, what chance do we have decades in the future. Only certainty I can see is if one decides to kill themself once they are no longer self sufficient. Even then, planning about doing it and doing it are very different things.
there's no way out of paying for someone's else retirement. it just change if you do it consciously and right, or be mislead.
You get contribution room for every year that you are 18+ and a tax resident. Money goes in post-tax; withdrawals of principle and growth are tax-free. Withdrawals can happen at any time with no penalty; you get the contribution room back in the following year.
Right now Canadians get $6000/year of contribution room; anyone who's been in Canada since they were introduced in '09 has something like $63k of contribution room accumulated. $6000 is a tangible number for a teenager with a part-time or summer job, and the lack of withdrawal penalties means that the account doubles as an emergency fund (which is what you should be doing with your first dollars if you go by r/personalfinance's chart).
Then again, the Canadians also don't have the whole "savings accounts are limited to six withdrawals" nonsense.
The main difference is that, before retirement age, Roth IRAs only allow the principal (not the growth) to be withdrawn without penalties. Also, people who earn more than around $150k are not allow to contribute to Roth IRAs (the exact threshold is based on a tax calculation called MAGI)
- Roth IRA is an investment account. Usually holds ETFs. TFSA can come both as a savings account and an investment account. People with lower MAGI are less likely to be able to weather the ups and downs of the market for their emergency fund.
- $150k MAGI is literally "any job at Google/Facebook"; and also roughly the poverty line for family-with-two-kids in SF Bay Area due to the housing prices here. Who actually has funds to put in a Roth IRA through the front door?
- Contribution room mechanism means that you have to know your MAGI before you can put money in it. In Canada, the banks display your contribution room on the online banking portal, because the calculation is the same for everyone.
- Any mechanism for a withdrawal penalty makes it regressive. Rich people rely on accountants or TurboTax to track basis; with the TFSA you can just look at your balance to see if it's safe to withdraw money, making it accessible to young people and immigrants.
- Rich people can contribute to the Roth IRA through a Traditional IRA, and in doing so, contribute more per year than folks contributing through the front door.
Calculate SS tax after these deductions, not before.
EDIT: Please let me know why these might be bad ideas. I think it's unfair that currently only people with employer-sponsored 401k plans can save $18k and everyone else has only an IRA with $5.5k limit. Or some people can do a self-employed 401k which is a thing I don't know a lot about. It's crazy there are so many options for what should be a simple thing "I want to put aside some money now, some of it tax free, for when I retire."
The point of waiting e.g. 30 days is EXACTLY that it exposes you to gains/losses and you can rightly say the two actions are no longer connected.
I think people make wayyy too much of the withdrawal penalty. Or assume that you can’t even touch it until you’re retired. It could be way higher. If you need the money 10% is not that bad...especially if you have an employer contribution.
If it’s for a emergency..like you lost your job then presumably you’d be in a lower income bracket for that year.
Every Californian (or anyone living in a state with high income tax) pays a 10% penalty just to live in that state.
Put another way, withdrawing from a 401k in a state with no income tax would probably amount to the same amount of tax any Californian pays on their normal income.