Are Retirement Plans (e.g. IRA, 401k) Another Scam to Steal Wealth from Middle-Class?

Question

My reasoning:

http://jasonhommelforum.com/forums/showthread.php?t=209&highlight=capital+gains+IRA+IRS

See also the links on this Question for more info about my vision of imminent hyperinflation:

http://answers.yahoo.com/question/index;_ylt=At_Gqqez54puDwAd0FvkVALzy6IX?qid=20060801090740AAVq3t4

Actually the hyperinflation started a long time ago and only recently feeding back into prices (see exploding gap between nominal GDP/income vs. M3/debt):

http://coolpage.com/commentary/economic/shelby/GDP%20vs.%20M3.gif
http://mwhodges.home.att.net/summary.htm#debt

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"ElOsoBravo", let rephrase the question more simply for you:

With taxes in Western countries likely to increase drastically (baby boomer retirement, massive debts), what idiot would prefer to pay 50 - 80% taxes later on ALL HIS GAINS via the deferred tax scheme of retirement plans, versus paying 5 - 15% capital gains tax through 2010?????

And if you think the 50% - 80% tax scenario is unlikely, then how are we going to unbankrupt our negative -$20 trillion aggregate net worth?

http://answers.yahoo.com/question/index;_ylt=Ao6eUsPuLNKWBTojc3E59__sy6IX?qid=20060726095414AAu52Ze

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"Veritatum17" numerous errors:

* Max. capital gains tax rate is 15%, not higher even for millionaires.

* Roth IRA contributions are taxed at income tax rates, e.g. 35% max.

* Roth IRA withdrawals taxed at 10%+income tax, before 59.5 age

* Ratio, not "difference", of GDP/M3 is economist's theory of money, called "Velocity of Money Supply".

* $4500 will become $45,000 or $450,000 with hyperinflation. Very big $.

* Investors (not "govt" seisure) will withdraw from IRA early, because dollar will become worthless in hyperinflation, they want to buy something real, e.g. physical gold or farm land.

* DinesLetter.com investments have increase 1000% in 3 years (36 months).

* CPI is a lie (hyperinflation is reality, see charts):

http://www.kitco.com/ind/benson/jul312006.html
http://www.kitco.com/ind/Willie/jul282006.html

* "tighter money supply" is another lie

* USA lost manufacturing, infrastructure crumbling

* Govt will (has been) hyperinflate away the debt

Answer 1

Oh, my! This is almost as funny as the post in a WSJ forum last year that said, since we have 3% inflation, and interest is proscribed against in Scripture, George Bush is not a Christian.

Okay, ignoring that you've conjured the Illuminati (you were joking, right? I mean, you could have mentioned "The Dread Pirate Roberts"), I'm going to try and trace your argument:

1) Roth IRAs lock in an investor's money with a carrot-and-stick approach: lower taxes paid by paying now instead of at withdrawal, and an early withdrawal penalty for drawing before 55 1/2.

2) The rate assessed on capital gains (ie investment income) is far lower than that assessed as income from retirement accounts, so one should keep their money out of retirement accounts in order to reap the gains now and not later.

3) There's going to be a tremendous economic catastrophe, including (but not limited to):
a) U.S. government fiscal crisis
b) hyperinflation (measured by the difference between nominal GDP and M3)
c) debt default (measured by the gap between income and debt)

4) Taxes will go up to an 80% level while market investments drop in value. Hence, every investor LOSES BIG TIME.

And hence, the admonition to "get out before it's too late" and put money into something 'safer' like gold and silver.

Ignoring that this would suit the vested interests of one with a substantial stake in gold and silver, let's take this argument as follows:

1) Roth IRA's provide a tax break only if one pays a lower tax rate on contribution than on withdrawal (otherwise, Traditional IRAs are preferred). The money is 'locked in' but we're only talking $4,500 a year. If this all that you are saving, you needn't worry about the federal government's finances as much as your own.

Furthermore, inherent in your argument that the tax rate will go up precipitously is the supposition that those investing in a Roth (and who already paid taxes on that investment) will have to PAY AGAIN upon withdrawal - which goes against the rules of the Roth. I'm sure you could say a government, so strapped for cash, would raid everyone's personal pension funds, but please come out and say it. This is not the fault of the Roth, nor intrinsic to its design. If you're thinking the government is untrustworthy and would reneg on any promises made, go ahead and say it. Otherwise, it's just financial gobbledygook.

2) The capital gains rate IS lower - if you're in the 10% and 15% tax brackets (ie, have an AGI less than roughly $75K). That includes some of the middle class, but not all. Those who are in the higher brackets don't enjoy as much of a benefit. Additionally, this is a temporary law, only in place until 2008, and only applies to LONG-TERM investmetns (those held more than 12 months). As you probably know, investments are historically less apt to be successful after only 12 months than over a much longer period. So, while it would make sense to pull out funds if you believe there to be an imminent financial apocalypse (and indeed, you can pull everything out of your mutual funds in your Roth and pop it into a long-term CD or even a series of short-term rolling CDs, or even into precious metal funds), you also mitigate much of the potential for growth.

3) As for the financial apocalypse itself, I remember hearing Prof. Kotlikoff of Boston give a speech on the matter - in this instance, brought on by the inability of the federal government to make good on its debt obligations. He advocated a revamping of the tax structure to place primary burden on consumption tax and do away altogether with the IRS to save money. It wasn't warmly received by the economists, financiers, and analysts at the Fed conference, although it was debated lividly. I can tell you that the consensus emerged only on one point - consumer debt is excessive and should be curtailed. Many speculate this is precisely the reasoning behind a tighter money supply, to choke off the easy credit and force consumers to cut back.

But anyway, I digress.

The risk of hyperinflation is minimal in the U.S. There are simply too many forces working against it.

The example you provided in one of the links (maybe it was off of an already-linked site) of the Weimar Republic simply doesn't apply to the U.S. today. Then, you had a nation whose factories were disabled, infrastructure crushed, and workforce substantially degraded by years of warfare, while simultaneously being made to pay an outrageous debt to the French. This was followed by a monstrous seignorage, the mechanism for hyperinflation.

In the U.S. today, you have adequate infrastructure, expanding supply base, a growing labor force, and several measures being taken to combat inflation.

I'd predict we could face a risk of inflation when the Baby Boomers begin to retire en masse, but this is only if they do. Many are working past retirement age, so even this phenomenon may prove to be mild. Besides, the majority of inflation in this instance will be in wages (which is good thing for most of us) and in healthcare (which is indeed bad).

Not to mention that seignorage is all but impossible in the U.S. No leader would be stupid enough to even attempt such a measure.

Your use of M3 has me perplexed. Most estimates use M2, with the understanding that M3 is statistically less precise. This is in part because it includes foreign reserves which may themselves be drastically inflated, as well as overnight paper which is often double-counted (since it exists both as a security and as a receivable on a bank's books). Because of these reasons, M3 is roughly 60% larger than M2, at least at the moment.

The income versus debt graph is troubling, but really how much of this is consumer, how much is business, and how much is government is not clear. The spectre of government default is terrifying but deeply unlikely - and even in that event, what would happen? No one has power to seize the assets of the government (unless you're Saddam looking for a reason to invade Kuwait), as we saw under Argentina's fiscal mismanagement and the ensuing default.

In the event of consumer default, no one but the consumer (and their creditor) really suffers.

The analysis you present overall reflects a static understanding of financial markets. When prices rise, spending habits change. Even if we do have drastic increases in the price of gasoline, you'll find innovation in the marketplace to match and offset.

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ADDITION:

See my link below on capital gains rates. A summary:

5% rate only applies to those taxpayers in the 10% and 15% income tax brackets, and then only on investments held longer than 12 months.

15% rate applied to those taxpayers in the 25% and higher brackets, and only on investments held longer than 12 months.

A 28% rate applies to collectibles - no matter for how long held - including precious metals.

For investments held less than 12 months, the rate is equivalent to the income tax bracket - no break.

Also, gold volatility is actually HIGHER than that of the stock market, meaning it is a less predictible investment, despite that the gold markets have a shorter history than the stock market (since Americans couldn't own gold before 1975). Also, since Chinese citizens can now own gold as of 2002, there is apt to be more volatility.

CPI is a lie, huh? That explains why you're not using real GDP, and instead are relying on M3, which again is not used by economists. But after looking through the pages in your links, something tells me you'd include economists in on the conspiracy to bankrupt America and seize power.

If such a conspiracy exists, I'd love to know about it so I can join it. Illuminati doesn't sound so bad after all....

Answer 2

Excuse me but I think that this is a "chicken little" question. How are IRAs "stealing money" from the middle class? They are giving you a market return, the amount of which depending on your investment astuteness,with the delayed tax benefit. No scam involved. Who would be the beneficiary of this alleged scam?
O.K. you have an apocalyptic view of the world economy, but you should draw your information from more informed sources than Internet forums, and the naysayers that have been around forever. Precious metals just sit there, There is no return, and, believe it or not, I recall some 30 years ago when gold was at $700 to $800 an ounce. Where would you be now if you were buying then?
Come back with views from some acknowledged, respected economists; not the fringe crowd selling alternatives to sound investing. I wonder want you would do with this mount of metal if the world economy actually did collapse. Be pretty hard to have some fun.

Answer 3

sure

Answer 4

get a life..