Saving in an IRA or a 401k is a ripoff

[doc03]

I retired this year and have a modest pension in addition to my SS and had to pay taxes on $2000 of my SS. I also have an IRA which I didn't withdraw any money from last year. (Remember when they told you if you put money in a retirement account you defer taxes until you retire and most likely you will be in a lower tax bracket? Well that may be true but something they didn't tell you is what happens when you withdraw the money.) I ran some numbers for next year in the event I want to tap into my IRA. If I would with withdraw $2000 from my IRA it raises my taxable income by $3000. That is the actual $2000 income and it increases the taxable SS an additional $1000. So in effect for that $2000 in actual additional income I pay $450 extra tax or 22.5%. Then I ran another scenario, say I would have to take $8000 from my IRA it would raise my taxable income by $8000 and would raise my taxable SS by $5975 for a total of $13975 in taxable income. So for that $8000 I would withdraw from my IRA it raises my taxable income $13975 and increases my taxes by $2100 for an effective tax rate of 26.25%. But here is the catch my income level is still in the 15% bracket even after including SS pension and the IRA money. While I was working the deposits to my retirement account wouldn't have been taxed at that high of a rate either.

[bbinacan]

1. Have you considered the effects

of tax deferred growth while in the IRA?

[doc03]

7. Growth? The S&P has been stagnant for a decade!

[bbinacan]

10. How long have you

been in a 401(K)/IRA. Just the last 10 years?

[Swede]

11. You do realize you make money on volatility?

[spooky3]

36. no, s/he doesn't, unless s/he had the very unusual good fortune

of contributing only when the market was down and timing the move of his/her stocks into money markets, bonds, etc. before the market declines. If s/he has been buying and holding steadily, like most retirement savers do, then s/he lost money on all of his/her investment when the share prices declined and gained some of it back at other times. And, most investors in mutual funds pay at least .6% annually in fees for the funds to be managed, which further reduces investment income.

[Swede]

38. Deferred sales charge takes care of that.

You make money on volatility,it's a fact. When you use a PAC,you buy more units when the price is low,and less when the price is high When you near retirement move the money to something more conservative.

[spooky3]

39. That is simply NOT TRUE. Check your mutual fund statements and any

reliable financial advising website.

The value of your account on any given date depends on the price per share. The amount of gain depends on what you paid for it. If you bought a share in an S&P index fund in early 2007, for example, you still haven't regained 100% of that value.

It really is quite simple.

[Swede]

40. Dollar cost averaging works.

I've been saving for 20 years and it works. It rally is quite simple.

[Statistical]

43. Sad how few people understand that.

Volatility is very good for long term investors.
Less volatility less realized benefit of Dollar Cost Averaging.

Granted as you get closer to retirement you need to protect yourself from volatility but for someone with 10, 15, 20 years till retirement the huge gap down in 2008/2009 represented a massive buying opportunity.

[WCGreen]

2. But what is your income, not your taxable income, but your income...

That is what the projections are based on..

[LiberalFighter]

3. How do you get taxable income of $3k on $2k?

Your post is so confusing.

[doc03]

6. I ran them on my tax preparation program. If you take $2000 out

of an IRA it goes on your income, right? Then when you run the extra $2000 on the SS income worksheet it ads $1000 of additional taxable SS income for a total of $3000 in additional income.

[spooky3]

21. You can't get $3000 of taxable income from $2000 of anything.

Maybe I'm not understanding - is what your saying that, because of your income bracket, your SS income would not be taxable if you had not withdrawn $2K from your IRA?

[PBS Poll-435]

32. MAGI is a crazy formula to determine SS taxability

Modified Adjusted Gross Income



So yeah, by making 1K more than the profile, you could pay an additional tax.

[Riftaxe]

4. Fortunately they are not mandatory

and that the Government puts out the regulations on them every year, just go visit a post office. Now if your a bit lazy and let someone else do your financial planning (it's not exactly rocket science, if you can breathe and drool you can handle the tax codes) you might run into a few problems.

[hfojvt]

5. it appears that your modest pension is over $25,000

since that was the tax threshhold for social security for a single person in 2005. And that makes $2,000 of your (at least $10,000?) into taxable income.

Wow, it must really suck to pay taxes on 20% of your income. 100% of my income is taxable (unless you count the standard deduction and the personal exemption - which you also get).

I really do not expect to have to worry about taxable social security benefits. Since my salary is at least $7,000 less than $25,000 I don't expect my pension to be more than that amount.

Not only that, but I have gotten a little smarter and put my money in Roth IRAs. The government pays me a credit of $750 (thanks to form 8880 and because I am low income) and the interest is tax free and I never have to pay back that $750. So that's a 50% return on a $1500 investment right there. That's pretty hard to beat.

Plus, you probably saved 20% on your taxes when you put the money in the IRA. So a tax rate of 26.5% in 2011 is still much better than a tax rate of 20% in 1990 (when you perhaps put the money in). It's better to pay 26% twenty years in the future than to pay 20% now.

[doc03]

12. That $25000 pension you claim is way out of whack. The way

they arrive at the $25000 figure is if (all your other income plus (50%) of your SS totals over $25000). If you check the tax tables the taxable income for a single below $34000 is only 15%. My taxable income comes no where near the $34000 threshold yet I would pay way over that. Like I said if I was to withdraw say $8000 for some unexpected expense I would pay an effective tax rate of 26.5% and yes that is well over the taxes I would have paid if I wouldn't have deposited it in a 401K.

[Statistical]

8. People still working should consider a Roth over traditional IRA.

Still you need to have pretty high retirement income to be taxed on SS benefits.

The cutoff is $25,000 however that is adjusted gross income + 1/2 Social Security benefit.

[doc03]

14. Exactly, Do think $25000 is an extravagant income for a

retiree? The Roth sort of came along a little too late for me to take advantage of.

[Statistical]

18. Yeah personally I think the cutoff is too low.

Do remember though it is $25K AGI so that is more like $35K - $40K gross.

[PBS Poll-435]

24. Just what deductions on page 1 do you plan to take 40K AGI to 25K?

For a retiree?

Tuition?

Student Loan Interest?

Early Withdrawal Penalties on Certificates of Deposit?


SS Taxability is based on the MAGI formula.

[Statistical]

25. Well if you have no deductions you will get std deduction and exemption which is roughly $10K

So $25K AGI is at least $35K gross.

Look I already said the cutoff is way too low. I would make it more like $80K but just pointing out AGI != gross.

[PBS Poll-435]

28. Simma Dawn Knaw

You can only "adjust" page 1 income by a few things

Student Loan Interest or Tuition (If your meet the income critera)
CD Early withdrawal
Teacher Costs
1/2 of SE Tax
DPAD
2106 stuff for mimes.

[Statistical]

31. DUH!. Brain fart on my part. Took me looking at 1040 is realize.

You are right. Yeah the limits on income for SS taxation are horribly low.

I have converted about 40% of my retirement assets to Roth I think I might but that up to 60% or 70% and use the Traditional IRA to fund retirement BEFORE I draw SS. To try an minimize this crap of a tax.

[PBS Poll-435]

9. UnRec

What about all of the tax savings that you had by contributing?

IRA - 1040 Page 1

401(k) - Box 1 vs Box 3 on your W2.



Discouraging people that save for retirement or disability is not a good thing.

[girl gone mad]

13. It's the tax hit that discourages people from saving.

There is no reason to be taxing retirement savings, now or later.

[browntyphoon]

15. It's another way to punish the middle class for working hard.

[doc03]

17. I have no problem being taxed on my pension or any income

an IRA, it is the tax on the SS income. I am being penalised for working a job that paid a pension and for saving in a 401K. What it does in effect is means test SS.

[doc03]

16. I don't know about that when you save and you are penalised for

it once you retire. Basically what that amounts to is means testing, if you have a pension or savings your SS is effectively reduced. Who can we thank for this, Bill Clinton.

[indepat]

19. Welcome to the club. Another nicety you might not have considered

when a withdrawal is made from your 401(k)/IRA: every dime of withdrawal, whether attributable to original contributions, capital gains, or dividends, is taxable at your highest marginal tax rate. Hence, you will probably be paying Uncle Sam a higher income rate by far on what may be your sole capital gains and dividends than do Warren B. and Bill G. Surely the writers of the tax code never figured out what I realized immediately or did so deliberately with full knowledge and malice of forethought: how convenient for my guess is they knew they were screwing over the little people, but you be the judge. PS Pubs never rail about the failure to restore the maximum percentage of social security subject to income taxes to the previous 50%, nor do they rail about the little people paying a higher income tax rate on possibly their only capital gains and dividends than to Warren B. and Bill G. for this is exactly what they intended. :)

[PBS Poll-435]

20. Wrong

Just so wrong.

Distributions at the appropriate age are taxable at the ordinary rate.

Early withdrawals are taxable at the ordinary rate. (10% penalty for early distribution)

Unrealized or actual capital gains are rarely, and I mean RARELY, assessed to the individual until distribution.



I haven't seen a 1099-B in like 3 years from an individual who was not taking distributions.

[indepat]

26. Not assessed until distribution, but then taxed at your highest marginal tax rate no matter what

part of the distribution and distributions in aggregate might have been attributable to dividends and capital gains which enjoy a favorable income tax rate if outside of 401(k)s and IRAs. If I'm wrong on this issue, just write me up as perhaps the most stupid ignoramus ever to have wandered down the pike. :P

[Statistical]

29. Then chose Roth over traditional IRA. No taxes on gains.

I mean sure IRA is taxed as income but you can't ignore the tax deduction on contributions.

Still if you don't like being taxed on gains then simply put your money in a Roth. No deduction on contributions but also no taxes on gains.

[PBS Poll-435]

30. Any distribution is taxed at the same rate that you would get working at Arby's.

:)

[indepat]

33. But capital gains and dividends are not earned income and enjoy a much more favorable

income tax tax treatment than earned income which is also subject to social security taxes up to a maximum earned income of some ($106,000?). Moreover, payroll taxes are in actuality taxes on income never received and which may never be received, in effect, a phantom tax on taxes, making the effective tax rate actually a good bit higher than the stated rate. Understanding the implications of these hard to swallow tax facts is easy for even a blind man to see, a deaf man to hear, and a dumb man to articulate. :P

[spooky3]

34. Distributions from 401ks, deductible IRAs, etc., are not treated as capital gains

because they received favorable tax treatment at the time of contribution. For income tax purposes, they are generally treated as ordinary income, though you're right that they are not subject to FICA.

http://www.bankrate.com/brm/itax/tax_adviser/20071004_IRA_distributions_a1.asp

[sendero]

22. I agree..

... and I stopped contributing to my 401K early last year. With the government piling on debt like there is no tomorrow, there are 2 distinct risks to your IRA or 401K.

The first is simple and as others have mentioned. The idea that you'll pay lower taxes on those funds when you withdraw them is highly suspect.

Second, there have been proposals made recently that would FORCE you to invest a certain amount of your 401K in Treasuries or other gov't instruments.

No freaking thanks.

[PBS Poll-435]

23. Contribute a smaller portion, then

But at least you will have an account when you need it.


Tax savings should not be the motivating tool to make sure that you have savings besides Social Security.

[sendero]

45. Luckily...

.. I'm of the temperament that I can save money without the help of a "retirement account". I'm saving the money that I used to put in the 401K. The advantage is:

1) I can do with it what I want, although barring a serious emergency need it is for my retirement

2) Not being part of a "government program" the money is not subject to the whims of the treasury and its bankster rulers

3) I reiterate, anyone that thinks taxes are going down is nuts

[Statistical]

27. Over last 3 years I have converted roughly 40% of 401K/IRA to Roth IRA.

"Second, there have been proposals made recently that would FORCE you to invest a certain amount of your 401K in Treasuries or other gov't instruments."
1) Never going to happen
2) Especially close to retirement a significant portion of assets should be in fixed income.

[browntyphoon]

35. Punishing people for saving money is stupid

[Swede]

37. It's a tax incentive.

No tax on growth,plus the tax deduction. Fold your refund back into the fund and your going to have a nestegg when you retire.

[cbdo2007]

41. You REALLY NEED to talk to a financial advisor.

and stop getting your advice from internet message boards.

Really, your understanding of these issues is very limited and a financial advisor will assist you in explaining some of these issues to you so that it makes sense and saves you money.

[Statistical]

42. "Really, your understanding of these issues is very limited"

The issue isn't that complex. If you income is too high you pay taxes on Social Security.

While talking to a financial adviser may be a good idea the idea that the OP doesn't understand what is going on is laughable.

The cutoff for taxing SS benefits is far too low.

[SOS]

44. Hidden fees will take another 10-15% of your retirement

This Bloomberg video explains how undisclosed fees will reduce your retirement considerably.
Worth watching if you have one of these accounts.
The fund managers are not required by law to tell you how much they are taking, even if you ask:

http://www.youtube.com/watch?v=x1NPUf2Q-sw

Edit to correct url