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Thursday, November 09, 2017

Alphabet Soup for the Retired Soul

Lawmakers recently decided that making tax changes to 401(k) and other retirement options was off the table, determining it to be political suicide.

I wholeheartedly agree, but I’m not sure why.  Our attachment to these tax incentives for retirement accounts is puzzling when we do not take full advantage of them, whether it’s because of misguided optimism or an inability to save due to economic factors such as low wage growth.  Or, it could be the preference for instant gratification, which explains why people are more intent on saving for their vacations than retirement.  As a result, almost half of all working-age families have no retirement account savings, and the median for families with retirement savings was $60k.

Yet, saving has never been as important as it is today.  Social security funds will run dry by 2034.  Pensions are a dinosaur of the past.  Life expectancy is increasing.  

So, that explains why we are mentally attached to our 401(k)’s and Roth IRA’s. 

But, to make saving a reality, we may need even more tax incentives than the current ones (how about a universal savings account?), and maybe some good old-fashioned Thaler/Sunstein nudges to boot. 

Thus, while it's a feel-good story that tax incentives for retirement saving are here to stay, wouldn't it be an even more feel-good story if we all used them more?

Posted by Margaret Ryznar on November 9, 2017 at 05:15 AM | Permalink


If becoming a problem for adult kids isn't an option, I really like the British Individual Savings Accounts and Canadian Tax-Free Savings Accounts. They work like Roth IRA's except you can withdraw from them at any time, for any reason. Locking up a lot of money for decades is just not appealing when people initially open their savings accounts, even though that might actually happen once the account is open. Also, there is no alphabet soup because there's just 1 multi-purpose account. So, it's not surprising that the number of Brits and Canadians who have these accounts is double those Americans who have Roth IRA's.

Posted by: Margaret Ryznar | Nov 10, 2017 4:59:12 AM

Social security may run out of funds prior to 2034 due to the continued loss of jobs in the retail and manufacturing sectors (we need the younger generations' contributions to pay for today's beneficiaries). I have a 401(k), self-directed IRA and Roth IRA. Hopefully my mortgage will be paid off in 3 years and the car loan in 4. If the cost to heat the house during winter does not increase too much and food inflation stays below 3% I may have enough funds set aside to live comfortably for 15 years. After that, I expect to "become a problem for my children."

Posted by: Paul | Nov 9, 2017 10:47:28 PM

Should we really nudge more money into 401(k)'s to further pump the passive index funds - especially when we do not even really understand how markets may function in a world dominated by passive index funds?

Posted by: anon | Nov 9, 2017 12:11:30 PM

You allude to, but don't address a problem in your title, and that's the alphabet soup of retirement account types. I personally have a 401k, a roth 401k, an IRA and a SEP IRA. I also have a defined benefit pension from a private employer.

The rules for each of these is different, the investment choices are different, and thinking about it makes my head hurt, and that's an inhibitor to either contributing or balancing my accounts well.

In Canada, they have a system of Registered Retirement Savings. You put in money, it's tax free. You take it out, it's taxed. It's slightly more complex than that, but there's no minimum distributions, no make up contributions, etc.

Posted by: Adam | Nov 9, 2017 11:07:45 AM

If you want retirement savings to be a reality, you don't need better tax incentives. You need workers to make enough money to be able to comfortably save for retirement. Tax incentives don't matter if you don't have money to save in the first place.

Posted by: Derek Tokaz | Nov 9, 2017 9:46:36 AM

If the current tax incentives aren’t working, doubling down on them doesn’t seem like such a great idea. Instead of more tax expenditures, how about using that money to shore up social security so it doesn’t go bankrupt in 2034? Or maybe even raising taxes and making it more generous so as to work with human nature instead of fighting against it.

Posted by: Brad | Nov 9, 2017 8:29:14 AM

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