Could your IRA be the next source of Government funding?

By Michael Vass | April 24, 2012

Estimates are that 70% of American households have a retirement savings plan. 46.8 million American households have some form of IRA’s. 60% of households have employer sponsored plans of which employee contributions are capped at $16,500 annually. Households age 50 or older, since 2002, are allowed to make “catch-up” contributions of up to $5,500 to their IRA savings. In 2011

“According to Fidelity Investments, the number of investors under age 30 who last year made tax-deductible contributions to a traditional IRA jumped 16 percent. The number was up 9 percent for Roth IRAs (which have no upfront tax deduction, but qualified withdrawals are tax-free).”

In total, IRA’s accounted for $3.5 trillion in assets at the end of 2008 – as the current recession was just ramping up and after the economic crisis had devastated portfolio’s. Today the sum is far higher.

Trillions of dollars, protected from taxes and unusable by the Federal Government which is desperate for funds to reduce a growing national deficit that is just under $16 trillion. Considering the Obama Administration continues to move forward with budget plans that call for over $1 trillion dollars being added to the national debt each year, is anyone surprised that plans are being discussed to tap into this slush fund of liquid cash?

As has already been reported by Mark Miller of Reuters Money

“President Obama’s National Commission on Fiscal Responsibility and Reform recommended capping combined employee/employer pre-tax contributions to 401(k)s at $20,000 or 20 percent of income, whichever is lower.”

Already you might be saying so what? Some might think that the extra 20% is money in their pocket and they have bills to pay. Some might say that those wealthy people that save so much in an IRA deserve to have their taxes raised and the money used by the Government.

In fact, every dollar the Government takes from an IRA, they are stealing tens if not hundreds or thousands of dollars out of your pocket. That’s regardless of your income bracket.

Let’s assume you are an Average Joe. You make $30,000 annually and put away $3,000 between employee/employer contributions. It brings you annual income to $27,000 on which you pay taxes.

If the Government moves forward, you will be limited to $2,400 in the deduction. That raises your income to $27,600 which you will pay the additional taxes on. Which is what the Government wants, more tax revenue.

But the equation is not done.

The Rule of 7 is an old but reliable way to figure out an investment like an IRA. It is derived from the mathematical formula for the Rule of 72.

  • IF you average 10% on your investments per year, your investment will double in value in 7 years. If you continue to earn 10% the next double is 1/2 that time, and so on.
  • IF you average 7% on your investments per year, your investment will double in value in 10 years. If you continue to earn 7% the next double is 1/2 that time, and so on.

    So if you have $1 invested in an IRA and earn 7%, in 10 years you will have $2. At the end of 5 years and the same average 7% return, $4. At the end of 2.5 more years, $8. Another 1.25 years, $16. Then 6.25 months later $32.

    This example goes a total of 19.375 years, far less than a lifetime, and provides a 3100% return with 5 doubles. Remember the example of the Government taking away that $600 from your IRA? That’s $4800 the Government took out of your pocket. That is only increased taxes for 1 year, imagine 5 or 15 before you retire?

    Now given, the real world is hardly as simple or predictable as the example above. Investments can lose money as well as gain. A recession can wipe out billions if not trillions of assets. Bad investing habits can do even worse.

    Still, one estimate of real return for investments in the Stock Market shows

    The average annual stock market return for the past twenty-five calendar years, was 10.5% (7.7%, plus 2.7% dividends)
    Stock market returns for the last 20 years: 9.4% (7.0%, plus 2.4% dividends)

    For those that prefer academics, Aswath Damodaran shows that the average return: 1962-2011 10.60% Stocks, 5.22% Treasury Bills, 7.24% Treasury Bonds

    Do the computations any way you wish. The net result is that if the Government decides to deny you the right to put as much money into an IRA tomorrow as you can today, they are effectively stealing your money. A lot of it. Just to slow down the rate at which the Government is going into debt – yes, just to slow it down, not pay it off.

    This will not be a big issue of the 2012 Presidential election. It won’t get a lot of coverage in the media. There is just too much math to deal with to throw it into a 30 second soundbite. Instead, Government will count on you not doing any math and letting them do whatever they want.

    It’s your money. It’s your retirement. Being used to pay for the GSA, Health Care Reform, and the Stimulus among literally thousands of other earmarks and government waste.

    Is that worth the ability to buy a new Ipad once a year?

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