A Future Without Retirement Accounts? [02/2024]

What’s better than great investment returns? Nothing. Well, except for minimizing the taxes you pay on those returns.

As a result, investors are hyper-focused on minimizing their taxes via tax-deferred (Traditional) and the more recent option, after-tax (Roth) contributions to their retirement accounts, including at work and in their IRAs. The goal is to beat the tax man at his own game.?

The problem is that the game itself is flawed.?

The government introduced defined contribution plans like your current or past employer-sponsored 401k and 403b and Individual Retirement Accounts (IRAs) to encourage retirement savings. It is a well-intentioned idea that hasn’t had the intended effect of increasing citizen savings. Studies have found that tax benefits have no meaningful impact on savings that would otherwise occur without these accounts. Unsurprisingly, most of the benefits of these tax savings filter to the highest earners.?

As a result, the government forgoes a tremendous amount of tax dollars ($185 billion per year[1]) not to get the desired result. Who cares, right??

Hopefully, the federal government,[2] who right now has a looming funding gap as near as the 2030s for that thing called Social Security.?

Now, here’s where the academics chime in. Social Security needs funding. Retirement tax subsidies don’t increase net savings. It’s with no surprise that academics are proposing to eliminate tax-advantaged retirement investing.

The first time I heard this idea, I couldn’t believe it. It seemed crazy that they would even consider eliminating the 401k and other retirement plan tax advantages.[3] After reviewing the evidence, it seems logical that taxpayers are getting a bad deal.

Optionality is a core tenet at One Day In July. We can make educated decisions with current information, but building flexibility for inevitable change is critical.?

For example, having your investments spread amongst taxable (Brokerage), pre-tax (Traditional), and after-tax (Roth) accounts can provide much flexibility before and during retirement.[4] If the academics are right, the time to accumulate Traditional and Roth assets could be limited. It is also a good time of the year to remember whether you want to maximize your IRA contributions for 2023.?

With all this said, minimizing taxes is a secondary order focus for most investors looking to accumulate wealth. The first step is the broken record: saving. If I save $1 a year, it is as close to inconsequential as one can be, whether that is in a taxable account, pre-tax, or after-tax account. While it’s fun to focus on getting more of your slice of the pizza, you need the ingredients to make the pizza.?

Speaking of pizza, Goldman Sachs thinks the GDP will increase by 1% thanks to new weight-loss drugs such as Wegovy and Zepbound.[5] Studies have shown that decreasing obesity increases the ability to work and to be more productive when working. Who knew GDP would grow as waistlines shrink?

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[1] The Case for Using Subsidies for Retirement Plans to Fix Social Security - Center for Retirement Research

[2] And taxpayers who are current/future Social Security recipients.?

[3] The idea would be to limit contributions to these accounts, limit the earnings, or tax the earnings each year.

[4] The marginal rate for married taxpayers with inflation-adjusted income of $100,000 has changed 39 times since the introduction of income taxes in 1913, ranging from 1% to 43%.

[5] Weight-loss drugs could boost US GDP by 1% in coming years, Goldman says - Reuters