How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into the game in a big way.


Social Security Is Staring at Its First Real Shortfall in Decades

By Jeff Sommer in the New York Times on June 12, 2019

A slow-moving crisis is approaching for Social Security, threatening to undermine a central pillar in the retirement of tens of millions of Americans.

Next year, for the first time since 1982, the program must start drawing down its assets in order to pay retirees all of the benefits they have been promised, according to the latest government projections.

Unless a political solution is reached, Social Security’s so-called trust funds are expected to be depleted within about 15 years. Then, something that has been unimaginable for decades would be required under current law: Benefit checks for retirees would be cut by about 20 percent across the board.

“Old people not getting the Social Security checks they have been promised? That has been unthinkable in America — and I don’t think it will really happen in the end this time, because it’s just too horrible,” said Alicia Munnell, the director of the Center for Retirement Research at Boston College. “But action has to be taken to prevent it.”

While the issue is certain to be politically contentious, it is barely being talked about in Washington and at 2020 campaign events. The last time Social Security faced a crisis of this kind, in the early 1980s, a high-level bipartisan effort was needed to keep retirees’ checks whole. Since that episode, the program has often been called “the third rail of American politics” — an entitlement too dangerous to touch — and it’s possible that another compromise could be reached in the current era.

Benefit cuts would be devastating for about half of retired Americans, who rely on Social Security for most of their retirement income. A survey released in May by the Federal Reserve found that a quarter of working Americans had saved nothing for retirement.

The shrinking of Social Security’s assets expected in 2020 would mark a significant change in the program’s cash flow, one that could complicate Americans’ retirement planning — even for the many relatively affluent citizens for whom Social Security is still a major source of income in old age.

“Fifteen years is really just around the corner for people planning their retirements,” said John B. Shoven, a Stanford economist who is also affiliated with the Hoover Institution and the National Bureau of Economic Research.

“The cuts that are being projected would be terrible for a lot of people,” he said. “This needn’t happen and it shouldn’t happen, but we’ve known about these problems for a long time and they haven’t been solved. They’re getting closer.”

Social Security has a long-known basic math problem: more money will be going out than coming in. Roughly 10,000 baby boomers are retiring each day, with insufficient numbers of younger people entering the work force to pay into the system and support them.

And life expectancy is increasing. By 2035, Social Security estimates, the number of Americans 65 or older will increase to more than 79 million, from about 49 million now. If the program has not been repaired, they will encounter a much poorer Social Security than the one seniors rely on today.

Under current law, cuts would start in 2034, when the main trust fund is expected to be depleted, or in 2035, if Congress authorizes Social Security to pay old-age benefits through the Disability Insurance Trust Fund.

Consider a woman with average annual earnings of $51,795 (in current dollars) over the course of her career, who retires at age 67 in 2037. The latest Social Security study indicates that she will be entitled to $27,366 in inflation-adjusted benefits. But if the trust fund shortfall has not been remedied, Social Security would be permitted to pay her only $21,669 — a 21 percent cut.

Nearly every older American would be affected, but those at the lowest income levels would be hurt the most. Social Security benefits are progressive, providing greater assistance for those with greater need. A worker with average career earnings of $12,949 until 2037 is entitled to receive the equivalent of 75.6 percent of that income, but with mandatory cuts, this person would have to survive on just 59.9 percent, the Social Security report says.

According to a study by the Center on Budget and Policy Priorities, 9 percent of all retirees lived in poverty in 2017 — but the figure would have been 39 percent if not for Social Security.

For African Americans, the study found, the anti-poverty effect has been even greater: 19 percent lived in poverty, but 52 percent would have done so if they had not received Social Security payments. For Hispanics, the numbers were 17 percent and 46 percent.

The reductions of roughly 20 percent on average are just a starting point. If current laws are unchanged and current economic projections remain intact, the cuts would rise to 25 percent in later years, a New York Times analysis of Social Security data indicates.

Unless Congress and the White House reach an agreement before the trust funds are emptied, most Americans will face hard choices: delaying retirement and working longer if they can, or simply surviving on less.

The Social Security mess already complicates some commonly accepted retirement-planning wisdom — such as the advice to delay claiming benefits until age 70.

People who do so are entitled to an 8 percent annual increase in benefits. That makes Social Security “the best annuity that money could buy,” said Wade Pfau, a professor of retirement income at the American College of Financial Services, in a 2015 report. But he redid his calculations at the request of The Times, and for workers who are 55 now, statutory benefit cuts just when they turn 70 could make that approach far less attractive, Professor Pfau said.

Cutting the Social Security checks of people in retirement is, to say the least, politically dangerous.

David Stockman, President Ronald Reagan’s budget director, tried to do just that in 1981. What happened in that episode gives some clues for a possible solution today.

Like other conservatives of that era, Mr. Stockman viewed Social Security as a form of “closet socialism” that needed to be scaled back. With the program facing a solvency crisis, he proposed immediate reductions in retirees’ benefits.

Older Americans rebelled, and members of Congress listened to them. “I just hadn’t thought through the impact of making it effective immediately,” Mr. Stockman observed ruefully in his 1986 book, “The Triumph of Politics: Why the Reagan Revolution Failed.”

A nimble politician, Reagan rejected Mr. Stockman’s recommendations and formed a bipartisan commission to study the issue. Ultimately, Reagan reached a long-term agreement with the Democratic speaker of the House, Thomas P. O’Neill Jr., who viewed the preservation of Social Security as essential.

While they made no immediate cuts in Social Security checks, they reduced benefits in more subtle ways, using measures that are still being used, like gradually delaying the standard retirement age from 65 to 66, where it stands today, and eventually to 67.

Taxes increased, too — bolstering cash flows and creating the trust fund surpluses that have given retirees and current politicians some breathing room.

But in ways large and small, the Reagan-O’Neill Social Security fix is coming undone. Notably, the hefty balances in those trust fund accounts today — some $2.9 trillion — may be having an unintended consequence.

“The trust fund surpluses were intended to provide a buffer that would give politicians enough time to show some fiscal responsibility,” said Robert D. Reischauer, a former Social Security trustee who was also head of the Congressional Budget Office and is now president emeritus of the Urban Institute. “But the problem is that without an immediate crisis, the politicians don’t have to act. And really, they would rather sleep. So when the crisis eventually comes, as it will, it is likely to be much, much worse because of the delay.”

John Cogan, a professor of public policy at Stanford, said Social Security’s fundamental problem was that benefits had been rising faster than revenue. Cuts, he said, will be unpalatable but inevitable.

“The solution, I think, is to slow the growth in real benefits promised to future recipients,” he said.

Democrats in Congress have suggested an increase in Social Security benefits, accompanied by higher taxes for the wealthy. In combination, the bill’s various measures would eliminate the program’s financial shortfall, according to projections by Stephen C. Goss, the chief actuary of Social Security.

Conservatives continue to push for sharp reductions in the size of Social Security as well as Medicare, saying the United States can’t afford the growing burden of the two “entitlement programs.”

“Entitlement programs in the United States have expanded more than tenfold since their inception, but workers are nowhere near 10 times better off as a result,” the Heritage Foundation said in a May 20 policy proposal. The conservative think tank favors cuts to benefits and siphoning money from payroll taxes into individual investment accounts. That echoes an initiative that President George W. Bush once embraced but Democrats blocked.

There are no signs of an imminent breakthrough, though Professor Cogan said that, as in the past, the impending prospect of benefit cuts “is likely to change the political atmosphere and make it possible to find a compromise.”

But Mr. Reischauer fears that, given the current acrimony of American politics, there will be no compromise until the last minute.

“We will need a combination of increased taxes and reduced benefits, undoubtedly,” he said. “But if we wait, the deficits will only grow and the eventual solution will be much more painful.”


Want Kids, a Degree or a Home? The Tax Bill Would Cost You

An immense tax giveaway to the rich will hurt everyone else. Here’s how.


Limit on 401(k) Savings? It’s About Paying for Tax Cuts

So Mr. Benna decided to try it out at his own workplace, Johnson Companies, a small consulting firm outside Philadelphia.

Without intending to, Mr. Benna set off a revolution. Nearly 40 years later, 401(k) accounts are the most common employer-sponsored retirement plans and a raft on which millions of Americans hope to float through retirement.

Suddenly, though, they are also at the center of a battle around the tax overhaul promised by President Trump and Republican leaders in Congress. A proposal to slash the amount of money workers can put in tax-deferred retirement accounts set off alarms among savers and members of the financial services industry, who contend that limiting the tax break would discourage contributions to 401(k) plans.

Many workers once could depend on defined-benefit pensions, but those plans — expensive for employers — have mostly gone the way of the Walkman. Instead, workers were left with the responsibility of saving for retirement themselves, with individual retirement accounts or 401(k)s. The switch has meant less security.

A retirement crisis already looms. Three out of four Americans worry that they will not have enough money to get through their retirements, according to the National Institute on Retirement Security. About 45 percent have not saved a cent toward it.

Mr. Trump, sensitive to the firestorm that could be provoked by limits on 401(k) contributions, tweeted that there would “be NO change” to this “great and popular middle class tax break” — before conceding it might be a part of legislative horse-Representative Kevin Brady of Texas, the principal Republican architect of the tax plan in the House, also scrambled to reassure critics that a rewrite would not undermine retirement savings.  “All the focus is on, can we help people save more,” he said.

Yet for all the alarming rhetoric about crushed nest eggs, there are a couple of things to keep in mind. First, the debate on Capitol Hill is not really about retirement; it’s about lawmakers’ feverish hunt for revenue to finance tax cuts. Second, no matter what happens, it won’t solve the fundamental problem — that many Americans will outlive their savings.

There are several types of subsidized retirement accounts. People who work at larger companies tend to set aside money in a 401(k); they don’t pay taxes until they withdraw funds. By contrast, Americans who open an account known as a Roth get a different kind of break. They pay tax on money before it is deposited, but then get to withdraw it and the subsequent earnings tax-free in the future.

Details of the Republican tax plan have not yet been released, but the talk has been of imposing a cap of $2,400 a year on tax-deferred contributions to 401(k) plans — a sharp reduction from the current ceiling of $18,000 a year for people under 50, and $24,000 for people age 50 and above.

There would still be a tax benefit, but it would probably be under a Roth-style structure.

To some people, enjoying the break when they withdraw money instead of when they deposit it may not make a difference. But for Republicans in Washington desperately seeking a fast boost in revenue, timing is everything.

Their tax bill includes giant reductions in business taxes. Figuring out how to pay for tax cuts is always a grueling task, but it is especially complicated in today’s bitterly partisan atmosphere. Republican lawmakers intend to push through a bill without any Democratic support — but there is a catch. The single-party strategy in this case triggers a rule that requires the policy to have no impact on the budget at the end of 10 years. To make the math work, lawmakers need to come up with the revenue to pay for the cuts sooner rather than later.

That’s where 401(k)’s come in. Rather than allow workers to continue delaying their tax payments, the Republican leadership wants to collect tax revenue on most new contributions upfront so they can use it to pay for those expensive corporate tax cuts. That’s the equivalent of a middle-class tax increase.

“It’s just an enormous budget gimmick,” said William Gale of the nonpartisan Tax Policy Center. “It’s raiding future revenues to pay for current tax cuts. This is not a retirement security story.”

The accounting sleight-of-hand irks Mr. Gale, a former economic adviser to President George H.W. Bush, because, he says, it is financially irresponsible. “It’s just government borrowing by another name,” he said. “You’re not really raising revenue,” just changing when it’s collected.

The question of whether deferring taxes on retirement savings is actually good policy, however, is a separate matter.

Tax-subsidized retirement accounts have long roused fans and critics. Budget cutters point to the trillions of dollars they cost the Treasury Department. Groups concerned about growing inequality complainthat the tax break primarily benefits higher-income Americans who would save for retirement anyway. Those with more modest salaries generally have less access to work-based plans or can’t afford to save. Consumer advocates worry they are too vulnerable to the vagaries of the stock market.

Still, these retirement plans are extremely popular among middle and upper-income voters and many of the politicians who represent them — which is why previous attempts to eliminate them have failed.

Whether a tax-deferred 401(k) or a Roth is a better deal is not clear. Younger workers starting out can reasonably assume they are in a lower tax bracket now and benefit from a Roth, while middle-age workers may assume they will be in a lower bracket after they retire. But mostly there are question marks. Who knows if Congress will raise or lower tax rates 30 years from now, or if someone will shift from a higher tax bracket to a lower one? (It wouldn’t be the first time taxes on retirement income changed — Social Security benefits were shielded from federal income taxes for decades before the law changed in 1983.)

Mr. Gale says he thinks the immediacy of the 401(k) tax break encourages people to save more than they otherwise might. So does Mr. Benna, the 401(k)’s inventor. Although he says the tax deferral alone — without employers matching some of their employees’ contributions — was probably insufficient to persuade lower-wage workers to participate, it has nudged up middle-class savings. “It’s harder to save the same amount after taxes,” he said. “There will be a drop-off in contributions.”

But other experts aren’t so sure.

Andrew Biggs, formerly a principal deputy commissioner of the Social Security Administration, said that for most people, it makes little difference whether they pay taxes on retirement savings now or in the future. Automatic enrollment and the employer matches are much more important than the delayed taxes, said Mr. Biggs, now a retirement specialist at the conservative American Enterprise Institute.

Some studies have confirmed his hunch. One team of researchers looked at a handful of companies that offered a tax-deferred savings plan and then added a Roth option to the menu. They found the total amount of contributions didn’t change much. “The tax deduction was a pretty minor force,” said James Choi, a finance professor at the Yale School of Management and a part of that team.

And depending on future tax law, Mr. Choi said that retirees with Roth accounts could get by with smaller contributions than those with 401(k)’s because they won’t have to pay as much tax on the savings they withdraw.

The possibility that people may save less overall is fueling financial services industry opposition to the tax proposal currently in Congress. Plan administrators — which include major mutual fund companies like Fidelity Investments and Vanguard Group — are paid a share of the assets under their control; if the assets shrink, so do their fees.

What worries Mr. Choi, though, is the Republicans’ idea to cap the amount of tax-deferred contributions at $2,400 a year, while treating the rest like Roth contributions.

Setting the cap there could drag down savings because people tend to interpret such thresholds as recommendations, he said. From that perspective, it would be better to eliminate tax deferrals altogether rather than set such a low ceiling.

Yet whether the 401(k) caps are untouched, slashed or abandoned altogether, the prospect remains that millions of Americans will face retirement with no savings.


Do Not Drain Your 401(k), or Let a Former Employer Do It


Your 401(k) Is Healthy. So Maybe You Are, Too.

By on AUG. 16, 2014 in the New York Times

 Before you suggest that friends or family members start to exercise or improve their diets, you might first want to ask a question: Are they saving for retirement?

What do retirement savings have to do with physical health? A new study from the journal Psychological Science finds that people who are good at planning their financial future are more likely to take steps to improve their physical health — and then actually become healthier.

The research, scholars say, offers a keen insight into the sorts of people who are likely to make short-term sacrifices in the name of a brighter future.

“It suggests that there is something very abstract and fundamental about caring for the future,” said Gretchen Chapman, an editor for the journal and a psychology professor at Rutgers University. “The sort of person who invests in retirement is the sort of person who takes care of their health.”

The results echo previous research showing that some people are more predisposed than others to invest in the future. But much of that work, Dr. Chapman said, has been in the area of addiction — why heroin addicts, say, think differently about future consequences than nonaddicts. And this paper adds another interesting twist: The results come not from a laboratory experiment but from real-world data.

The researchers gleaned the findings from a trove of financial and health information that a midsize industrial laundry company in the Midwest collected from its employees, with their consent. The data was gathered anonymously by a third party and in turn provided to researchers at the Olin Business School at Washington University in St. Louis.

Broadly, the researchers looked at employees’ contributions to their 401(k) plans and compared them against various measures of their health, including blood test results; cholesterol, kidney and iron levels; exercise frequency; and whether they smoked.

First, the measures of about 200 employees were taken to establish a baseline. Then all the employees were told their health results and given instructions on how they might improve. A year later, they were tested again, in some cases more than once.

Employees who contributed regularly to their 401(k) plan were not only more likely to take steps to improve their health but also, in aggregate, had a 27 percent improvement in their blood scores. “Noncontributors continued to suffer health declines,” the paper said. The 401(k) contributors also showed relative improvements in safety behaviors, like seatbelt use.

The paper’s co-author, Lamar Pierce, an associate professor of organization and strategy at Olin, said the findings should inform public policy debates about nutrition and personal finance. Some people, he said, respond well to information and education, but others — like the employees who neither saved nor took care of themselves — may need stronger solutions. “Having a single-pronged policy is not effective,” said Dr. Pierce, whose co-author was a graduate student, Timothy Gubler.

Dr. Pierce said that people who didn’t respond to education might need tougher remedies — such as taxes on sodas to discourage consumption or, in corporate settings, cafeterias that offer only healthy foods.

“If you think health is really critical for productivity or health insurance costs,” he said, “you really need to constrain free choice.” He added, “You have to have mandates.”