Posted on 10/10/2005 8:15:18 AM PDT by hripka
American workers have been getting the short end of the stick since 1943.
That's when the United States Congress, in response to the costs of World War II, passed the Current Tax Payment Act. The act requires employers to withhold taxes from their employees' paychecks, overturning the previous system in which workers were paid first and settled their tab with the government later.
The Current Tax Payment Act is why so many people look at their paychecks and wonder where all their money has gone.
My poor dad -- who also happened to be my real dad -- often said to me, "Go to school, get good grades, so you can find a good, secure job with benefits." My rich dad, on the other hand, had a different point of view.
Instead of advising me to work hard for money, my rich dad said, "If you want to earn more and pay less in taxes, you need to have people and your money work hard for you." In other words, my rich dad encouraged me to be an entrepreneur and investor.
Today, workers who save money and invest in a 401(k) plan are the highest taxed people in America. Now, I can hear some of you asking, "Isn't saving money and investing in a 401(k) having your money work for you?"
No -- at least not according to the IRS. A worker's pay is taxed at the highest tax rate possible. So are your savings and income from your 401(k). In most cases, money goes into a 401(k) tax-deferred but comes out as highly taxed ordinary income.
One of the reasons the rich are getting richer is because they have more control over our number one expense: Taxes.
For example, my passive income from real estate can be the lowest taxed income of all. On one of our commercial properties, my wife and I receive approximately $30,000 a month in income -- almost tax-free. When we sell the property, we can legally take the capital gains without paying capital gains tax, which in our state would be 20 percent. Try doing that with stocks, bonds, mutual funds, or real estate investment trusts (REITS). In fact, mutual funds can be a tax trap if you do not understand the rules.
Another example, when we invest in oil and gas projects, we receive approximately a 70% tax deduction and a depletion allowance -- another tax break -- for income from oil and gas revenues. That means if I invest $10,000 in oil and gas, I can deduct approximately $7,000 from my income as well as receive a tax break for income from the sale of the oil and gas.
Obviously, I'm not a tax professional and you should not make any tax or investment decisions based on this brief article. My point is this: If I had followed my poor dad's advice and got a job with a 401(k), there would be almost nothing an accountant could do to protect me from higher taxes. The 1943 Current Tax Payment Act saw to that. Today, employees with a 401(k) work hard and earn less.
The federal government provides the biggest tax breaks for business owners and investors in oil and gas and real estate. Why? Business owners provide jobs and jobs mean employees who pay higher taxes. The economy needs oil and gas so anyone who explores for oil and gas are given big tax breaks. And people who invest in real estate are given big tax breaks because the government needs investors to provide housing. If investors didn't provide housing, the government would have to.
After 1943, people who worked for money lost most of their tax breaks. Now, entrepreneurs and investors get the big tax breaks -- and that's another reason the rich get richer.
Today, workers who save money and invest in a 401(k) plan are the highest taxed people in America. Now, I can hear some of you asking, "Isn't saving money and investing in a 401(k) having your money work for you?" No -- at least not according to the IRS. A worker's pay is taxed at the highest tax rate possible. So are your savings and income from your 401(k). In most cases, money goes into a 401(k) tax-deferred but comes out as highly taxed ordinary income.
QUESTION: Is Robert Kiyosaki correct? Is a 401k worth it? Disregarding the company match, is it preferable to have your long-term investments in a taxable account? Isn't a 401k a long-term bet on future income tax rates?
Second comment: Eliminate withholding FIRST, and then you will see tax reform.
"Is a 401k worth it?"
You're right that a it is in a sense a long term bet on future income tax rates, but the underlying belief is that when you retire you will fall into a lower bracket.
Bump for an interesting article. I've noticed that everyone's originally taxed earnings are taxed over and over again. Interest on your meager savings is taxed, and when you die, your money is taxed up the ying yang in the form of an Estate tax.
Make people pay cash for their taxes, and make election day the day after...
Those quarterly tax payments experienced by the self employed seriously help clarify the tax burden. I read on FR once that an employer tried paying his employees gross cash earned at one window, then collected the tax bite at the next window. The Feds were not amused.
One thing that is often ignored in 401Ks, that a business may contribute to your savings plan.
Let's say you invest ten percent of your income in your 401K. The business may contribute a matching four percent. Now you're banking fourteen percent. A forty percent yield at the time of deposit.
This is an immediate benefit. You don't have to accrue interest for a year, it's paid in when your contribution is made, and both contributions collect interest.
David Chilton, author of "The Wealthy Barber" suggested that if you are not in a 401K that offers matching funds, marry someone who is.
Isn't this a pretty strong argument for the Fair Tax? Also, I have less problem giving the rich a tax break mainly because they are contributors to the system, especially in terms of creating jobs. Further, I have no problem helping the poor to learn a new trade or skill so they can help themselves, but the trillions of dollars we've thrown at the War on Poverty hasn't solved the problem at all.
If we adopt the Fair Tax proposal, questions like these become moot.
You better believe it is. And when social security goes broke, and the grasshoppers who didn't save start crying to the government for money, where do you think Uncle Sam will find it? In the paychecks of low-wage workers? Think again. The big money-pile target will be the collective 401K accounts of those people who thought they were securing their future. They should think again. Pay the taxes now and get it over with. If you don't you will regret it in the future. They WILL come after your account with confiscatory rates. Watch and see.
It's also a long term bet against inflation.
The dollar you put it will probably be worth more than the one you take out, and they'll take the higher tax out of the less worth dollar leaving you with even less.
I use to think that until I realized that by the time I deduct my mortgage interest and dependent deductions, I am in a LOT lower tax bracket (more than 50%) than my parents who have paid everything off and are living on their military retirement and 401K.
"Is a 401k worth it?"
Depends if there is an employer match. If no match, I would at least partially invest in something that grows tax free --- such as real estate.
I am comfortable and could easily retire just based on the value of my company (which I could sell) and, even more so, my royalty and working interest money from oil and gas investments.
But I bought most of my holdings at $9 oil (and less than $4 Nt. gas) when everyone said West Texas was going to blow away and the last person to leave Midland County needed to turn off the lights.
Keep dreaming. The politicos in washington will never give up the power that the current tax code gives them.
Robert Kiyosaki is not correct about this or many other things, including his own life (he apparently made up parts of the book--for example, "rich dad" apparently never existed. In my opinion, he is a con artist. If you go to johnreed.com, he does a good job of pointing out RK's errors.
Most reputable financial advisors would tell you to use the following priorities in preparing for retirement. Fund (1) your 401k to the full extent of the match; (2) fund your Roth to the maximum; (3) fund your 401k to the max.
By funding a 401k, yes, you will be taxed at ordinary income. However, you minimize your current tax liability and your money compounds tax deferred for decades.
Also, capital gains tax rates might be the same as ordinary tax rates when you retire (e.g., tax the rich who are the only people with capital gains, according to the libs), so you're better off taking the guaranteed tax deduction now.
You're probably right, but I sure wish enough people would get miffed and vote them out of office...more pipe dreams...
There IS NO "pretty strong argument" for that ridiculous proposal.
It's an abomination -- probably the most fraudulent piece of legislation ever put forth in Congress.
That having been said, one good thing to take from his book is that putting all of your money into a Savings Account is bad. You'd get better return by putting in a sock under your mattress. However, it absolutely does not follow that if a little risk is good, then much more risk is better.
I've read the Bortz book on the Fair Tax and there are a few technical issues that are likely wrong (e.g., the demand curve for everything is perfectly horizontal), but I believe that either a Fair Tax or a Flat Tax would be far superior to the current tax system and its codes. The redistributive effects of the current code is most harmful to the economic system and artifically distorts the allocation of resources throughout the system.
Even so, it has been pointed out to me that rental income does not have to contribute to FICA. There are expense deductions available as well. Not to mention risk.
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