I mentioned yesterday that after the Carnival of Personal Finance I would explain my choice of a Roth 401k over a traditional 401k.
Why Roth 401k?
I heard some excellent arguments from Living Almost Large and a few others about the benefits of using a traditional 401k. The arguments are solid, but a main point everyone was making is that if you are in the 25% or 28% bracket, then you pretty much have to use the traditional 401k because of the tax benefits. I agree with that statement. However, a vast majority of our income is not in the 25% bracket, only a portion of it. Sure, using the 401k could help knock some of that income down into the 15% bracket, but not enough to make me switch back.
Secondly, this is the easiest option. It may land me in the same category as Lazy Man, but having to do research on the difference in taxes 30 years from now is time consuming. This way I don’t have to deal with that for now. That sounds bad, and it kind of is… but I am still saving for retirement. Plus, I think tax rates are only going up.
Third, my employer match is given as a pre-tax contribution. So I still have to deal with taxes whenever I retire.
My Real Concern: Taxes Go Up, Up, Up
I am almost certain tax rates are going to go up. Some argued that we might switch to a 15% flat tax. I can virtually guarantee you that will never happen in the United States for three reasons.
For the record, I’m all for a flat tax with rebates for the poorest earners. I think it’s a great idea.
However, income taxes and the breaks that different constituients are able to take year to year give Congress power. They can give special deductions and change the tax codes to make sure they get their campaign contribution from year to year. It sounds shady and cynical, but that’s how I see it. Congress will never give up that power.
The second reason is what would we do with all of the accountants? If doing your taxes amounted to adding up your W2 with any other forms of income and taking out 15%, that seems pretty easy. The tax code is so thick and complicated that we’ve created an industry to support it.
Yes, even with a 15% flat tax there would still be special circumstances and thus a need for accountants. I just don’t think it would be anything near what we have today.
Finally, have you seen our national deficit? Americans seem to be following the lead of the government in spending more than we bring in. Our national debt is enormous and I don’t see it being erased overnight with a new administration. On top of that you have the social security and medicare issue to figure out in the next thirty years. If we keep taxes the same something is going to either shut down or have benefits cut. That’s politically unpopular. Raising taxes is politically unpopular, too… but if it is the only way to keep the programs running then they will raise taxes.
Keeping Contributions the Same… for now
I’ve also decided to keep my contributions at the same amount. I was thinking of stopping or lowering contributions and applying the money to other saving goals. I’ll keep them unchanged for now, but I still may make a change later on.
Again, I’m not saying I am making the best decision. For now, inaction seems better than action.
Each situation is different, but what do you think of my decision?