the reform in retirement accounts that’s not coming
If you want me to get started on a rant about personal finance, ask me about retirement accounts. From the “no-taxation” benefit of Roth accounts (yeah, the government will never touch those) to the “benefit” of 401(k)s (no better benefit than having your retirement savings steered into a narrow set of corporate-defined funds), retirement “savings” are a bum rush.
If you look at the tax-advantaged system in the US, it favors publicly-traded corporate equities – and the mutual fund giants who trade them – to an overwhelming degree. 401(k)s, IRAs, CDs, etc. – all favor the large financial institutions favored by the government. Want to put some money into a tax-free IRA? Better be ready to put it into the stock market. If you want to invest it in the real estate market – an individual property, not a REIT – or a non-public business (investing $10K in a neighbor’s company), forget about it. The government wants you in the market.
I’ve thought that one of the most exciting reforms that could come in personal finance would be a real reform in retirement savings. Tell people that there is one choice – a retirement account, tax-free up to a set limit per year, that you could invest in anything. Anything. Want to invest in your neighbor’s eBay business? Your own dog-walking business? Anything would be allowable as long as the principal remained in the account.
The problem with such an account is obvious – keeping track of the investments and verifying that they are really investments would be difficult. If I claimed a TV as an “investment” in my retirement account it would circumvent the idea of such an account. But why should the only government-sanctioned way to save money in a tax-free account be to invest it in the stock market? Wouldn’t tax-free investments in other activities help the economy even more than buying corporate equities?
The easiest way to implement such a system would simply be for the IRS to allow you to deduct a certain amount of income from your gross income as long as it was spent on certain activities. If I spent up to $6000 on building a small business, for example, I could simply deduct that from my taxes. If I spent $6000 on a trip to Vegas, it wouldn’t be deductible. To me, it’s a simple idea and far more fair than forcing investment in the market; but then again, that’s why it won’t ever happen.
photo credit: beneneuman