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Roth 401(K) Phobia

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One of the hot financial services stories of the month is the idea that Congress might eliminate traditional 401(k) plans and replace them with Roth-only 401(k) plans.

Today, many workers get tax breaks for contributions up front and pay taxes on the distributions after they retire. Some pay their taxes now, make their contributions with after-tax money, and go to sleep dreaming cheerfully about the idea that they will be able to withdraw the cash free from income taxes after they retire.

(Related: GOP Proposes Radical Change to 401(k) System)

My question always was: How can a saver trust the federal government to keep a promise not to tax a stream of income? To me, that always seemed to be the fiscal equivalent of expecting Curious George, the monkey in the children’s books, to sit quietly in a chair in a chocolate factory and not play with the automated conveyor belt producing the chocolates.

Of course Curious George will play with the conveyor belt.

Of course the federal government will eventually find some way to get at the income flowing out of Roth individual retirement accounts and Roth 401(k) plan accounts.

Maybe members of Congress will try to look innocent and ask, “What, us go back on our word?”

The government has shown its lack of reliability by doing what it can to keep interest rates near zero for almost 10 years, a maneuver that helps debtors, including the U.S. government, but hurts responsible retirement savers.

The government has also shown its lack of reliability by letting Medicare operate in such a way that one trust fund or another always seems to be one suspenseful vote away from insolvency.

Finally, the government has now confirmed its lack of reliability, beyond any doubt, by turning the fate of the Affordable Care Act risk corridors program and cost-sharing reduction subsidy programs into a political football.

Health insurance companies are huge companies with a mammoth lobbying operation.

Whether the ACA subsidy programs should have existed is one complicated, controversial question.

The uncertainty about the subsidy program payments facing the insurers that relied on the subsidy programs is another complicated question.

Even if some ordinary consumers hate the subsidy programs, any consumers who are thinking about depending on the federal government to keep its word about anything longer than about a day may see the current state of the programs as a warning.

If health insurers can’t count on the government honoring commitments to them, how can ordinary people without their own staff lobbyists think the government will treat ordinary retirement savers better than it treats giant, powerful health insurers?  

— Read Financial crisis still haunts middle-income baby boomers on ThinkAdvisor.


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