The rates would need to go up enough so that your overall tax rate in retirement is greater than the marginal rate you pay taxes at today. That would be quite the taxation increase, probably above the historical norm at any point in the US, unless you're well above the 33% bracket, in which case the probability of your rates increasing is a lot higher.
If you live in Silicon Valley, a new grad would probably be in the 28% or 33% bracket just to be able to afford renting a studio apartment on their own.
GP is talking about Federal brackets. 33% starts at $190,150 AGI (after deductions) which is well above what a new grad could expect (from their employer) or require to pay rent, even in the valley.
It's also worth noting that by historical standards tax rates are actually low. So if we assume the possibility of mean reversion they could well be higher.
I see the Roth/Regular as a bet-hedging opportunity - ideally, put some in each type and then you are ensured against either scenario.
There is a difference between nominal rate and effective rate. The effective rates are fairly close to the past for high wage earners, lower for low wage earners.
>...In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.
>In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.
Seems like in the case of tax, it does. They weren't taking a random % of income in income tax based on what was in the memory cell from the previous call stack. They were taking 0%.
This is an interesting point, but not something we can solidly plan on. Vs we can absolutely say what the best way to play the game is based on todays rules.
It's a pretty safe bet that the next 30-40 years is going to explode in entitlements spending and infrastructure costs.
If the government folks don't pay them, then it's going to basically be Mad Max and your IRA (whatever the type) won't really help you much.
If the government folks do pay them, then the money for that has to come from somewhere. It's very unlikely to come from businesses, because the little ones don't make enough and the big ones pay very bright lawyers and accountants to keep the .gov away (cough Apple cough). So, it's probably going to come from income tax.
If you consider the risk of massive tax rate increases over 30-40 years significant, due to the need to pay for massive entitlement and infrastructure spending, also consider the risk that they will tax Roth capital gain withdrawls to pay for it as well.
No, that money would have been in a 401k, so you would lose out on the initial benefit of not having paid taxes when you contributed if they raid Roths.
But, if you've already maxed out your other tax-advantaged space, and you have more money to contribute, there is no reason not to put it in a Roth instead of a regular taxable account, assuming you are eligible, because then you can have tax-free growth at least(worth less than tax-free contributions, but still worth a lot).
In the same scenario that Roth IRAs are at risk of extra taxation (or fees), 401(k)s are as well. That doomsday scenario isn't worth planning for with money, but with physical assets (property, food, tools) and skills because that's the scenario where the US economy collapses (not a recoverable crash like 1929 or 2008, but a true, complete collapse where the USD value goes to zero).
Roth IRAs make sense if you make too much to contribute to a Traditional IRA with tax advantaged contributions and little enough to still qualify for the Roth.
They also (both traditional and roth) have an advantage over a 401(k): You get to manage the funds any way you want. You also get to contribute even when your employer doesn't have one, you just need income (capital gains don't count, as I understand it, so being semi-retired and living off your earnings does preclude you from contributing).
You're also limited on 401(k) investments to whatever your employer contracted for. Could be shitty, could be stellar, you don't control it.
That's what I try to be mindful of regarding Roth. How strong is the promise that it won't be taxed? Or maybe it isn't taxed, but new fees are introduced as a roundabout tax.
Like a lot of retirement thinking, it's unsettling to think about the negative scenarios.
I think it is unlikely, but the chance that they will tax Roth withdrawals is positively correlated with the very scenario that makes contributing to them advantageous, a massive tax hike in the future. If the government needs money that badly, everything is potentially on the table, down to a flat haircut tax on bank balances.
Also note that any increased or decreased "need" doesn't factor in to the calculation.