Guessing Tax Rates in 2030

[Rexindex]

2030 is my target retirement date. At some point you must guess what tax rates will be then and this is where I need help.

Without getting into a political discussion, with our national debt, taxes will have to go up.

My guess is that Capital gains rates for long term investments will be in the 25-30% area. I also guess personal income rates will have to range from 20% on the bottom end to 45% on the top end.

At the end of the day I figure I need to add 30% on to my retirement total to ensure against tax rates moving higher. I would enjoy hearing others thoughts on how they anticipate tax rates in or around 2030.

-Rex

[TheDan666]

No idea. What you say sounds plausible. If that were the case you should put as much as you could in Roth IRAs and Roth 401ks. Although, who knows, maybe they will tax withdrawals from there one day. I think its hard enough executing a financial plan for what you already know without adding in unknown conjecture into the equation.

--The Dan

[rob]

Don't know but I don't think it's the critical question. I think the real question is on a person by person basis (we will be different) - Is it higher or lower.... That gives me a 50/50 chance which is FAR better then what the rate will be which is 0% chance of been right.

I am thinking higher based on what I THINK my income will be in the future (plus with young kids and mortgage I have lots of reductions) so am 100% roth (401K and ira).

Edit: Also I should mention that I have past pre-tax 401k/ira, so it's also to balance that out so I have some of both in retirement.

[White Coat Investor]

2030 is my target retirement date. At some point you must guess what tax rates will be then and this is where I need help.

Without getting into a political discussion, with our national debt, taxes will have to go up.

My guess is that Capital gains rates for long term investments will be in the 25-30% area. I also guess personal income rates will have to range from 20% on the bottom end to 45% on the top end.

At the end of the day I figure I need to add 30% on to my retirement total to ensure against tax rates moving higher. I would enjoy hearing others thoughts on how they anticipate tax rates in or around 2030.

-Rex

Einstein said make everything as simple as possible, but no simpler. You've gone simpler.

This is a very complex problem. The national debt problem (and I'm not even sure all agree there is one) can be solved without raising personal tax rates at all in several ways: Cut costs, cut loopholes, introduce alternative taxes, grow the economy or some combination of the above. Also, you could just raise rates on the top earners, or just on the bottom earners. There's a lot to it.

You really think you'll need 30% more because taxes will be a little higher? I think that's way, way too conservative. If you're really worried, have 5% more. Or better, put more into Roths now and update the basis in your taxable accounts i.e. pay more taxes now instead of later.

[rob]

Or better, put more into Roths now and update the basis in your taxable accounts i.e. pay more taxes now instead of later.

My concern here is that the US moves to a consumption based which effectively wipes out the benefit of a roth now..... Not the first country I have lived in that has moved to a consumption tax (in ADDITION) to income tax.

[Rexindex]

2030 is my target retirement date. At some point you must guess what tax rates will be then and this is where I need help.

Without getting into a political discussion, with our national debt, taxes will have to go up.

My guess is that Capital gains rates for long term investments will be in the 25-30% area. I also guess personal income rates will have to range from 20% on the bottom end to 45% on the top end.

At the end of the day I figure I need to add 30% on to my retirement total to ensure against tax rates moving higher. I would enjoy hearing others thoughts on how they anticipate tax rates in or around 2030.

-Rex

Einstein said make everything as simple as possible, but no simpler. You've gone simpler.

This is a very complex problem. The national debt problem (and I'm not even sure all agree there is one) can be solved without raising personal tax rates at all in several ways: Cut costs, cut loopholes, introduce alternative taxes, grow the economy or some combination of the above. Also, you could just raise rates on the top earners, or just on the bottom earners. There's a lot to it.

You really think you'll need 30% more because taxes will be a little higher? I think that's way, way too conservative. If you're really worried, have 5% more. Or better, put more into Roths now and update the basis in your taxable accounts i.e. pay more taxes now instead of later.

EmergDoc: Thanks for the reply. I guess I cant see how we will not raise taxes when there is neither political will to curb medicare/medicaid/social security spending and no will on the part of the American people to curb them either.

The debt does matter (again, trying not to get too political to have this thread deteriorate) and taxes WILL need to rise at some point. Unfortunately the responsible people who have saved are likely to bear an undue burden paying for those who will not save (There are countless credible financial authors who believe this as well).

In our lifetime the top marginal rate was once 90%. How quickly we forget.

I am just trying to figure out what I will need in 20 years......

[White Coat Investor]

2030 is my target retirement date. At some point you must guess what tax rates will be then and this is where I need help.

Without getting into a political discussion, with our national debt, taxes will have to go up.

My guess is that Capital gains rates for long term investments will be in the 25-30% area. I also guess personal income rates will have to range from 20% on the bottom end to 45% on the top end.

At the end of the day I figure I need to add 30% on to my retirement total to ensure against tax rates moving higher. I would enjoy hearing others thoughts on how they anticipate tax rates in or around 2030.

-Rex

Einstein said make everything as simple as possible, but no simpler. You've gone simpler.

This is a very complex problem. The national debt problem (and I'm not even sure all agree there is one) can be solved without raising personal tax rates at all in several ways: Cut costs, cut loopholes, introduce alternative taxes, grow the economy or some combination of the above. Also, you could just raise rates on the top earners, or just on the bottom earners. There's a lot to it.

You really think you'll need 30% more because taxes will be a little higher? I think that's way, way too conservative. If you're really worried, have 5% more. Or better, put more into Roths now and update the basis in your taxable accounts i.e. pay more taxes now instead of later.

EmergDoc: Thanks for the reply. I guess I cant see how we will not raise taxes when there is neither political will to curb medicare/medicaid/social security spending and no will on the part of the American people to curb them either.

The debt does matter (again, trying not to get too political to have this thread deteriorate) and taxes WILL need to rise at some point. Unfortunately the responsible people who have saved are likely to bear an undue burden paying for those who will not save (There are countless credible financial authors who believe this as well).

In our lifetime the top marginal rate was once 90%. How quickly we forget.

I am just trying to figure out what I will need in 20 years......

Sure, the top marginal tax rate was 90%, but that wasn't on people with $50K in taxable income. In 1963 the top marginal rate was 91% on people with $400K a year in taxable income. That's the equivalent of something like $3 Million a year in today's dollars. If your 401K withdrawals will be anything like that you've got a spending problem. In 1963, the bracket for someone with $10K in taxable income (equivalent to something like $62K today) was only 26%. Today a married couple with $62K in income is in what bracket? The 25% one. So if you saved 5% more you have a pretty big margin of error. 30% more is way, way too much.

So say your tax bracket goes from the 25% to a new bracket at say 30%. How much more do you need? 5% more. There you go. Our deficit would easily turn to a surplus if all tax brackets were raised 5%.

I don't see why a grand compromise isn't possible in Washington to solve this problem. Raise the SS age a couple years, continue efforts at healthcare reform, cut defense spending a bit, cut out a couple of tax loopholes, raise taxes slightly on everyone (just expiring the Bush tax cuts for everyone would probably do), there you go, problem solved. The health care reform will be the hardest part.

[Manbaerpig]

I don't think the federal government has ever been able to effectively cut expenses, therefore I agree the tax rates are going to have to rise, or inflation just eats the $ away, either way I think a 25% or so factor for the combined tax increase and/or additional currency deflation is wise.

[Random Musings]

Who knows what the future tax rates are going to be? But I have a strong suspicion that VAT will be part of the festivities moving forward.

RM

[Hector]

Seems like with your current investment situation you are projecting that you will have enough to retire comfortably, but you are interested in saving and investing more and trying to project 30% more tax to justify your need of wanting more.

[tyrion]

I'm looking at 20-something years to retirement, and I don't have the answer as to what tax rates will look like. But here's what I'm doing- diverisfying across account types that have different tax characteristics.

Some of the money is in traditional tax deferred accounts (401k, SEP IRA, etc). This can be taken out optionally prior to RMDs at 70, probably to the extent that we stay in the 15% tax bracket.

Some is in Roth IRAs. These obviously look good now, but could be less appealing with additional taxes on comsumption.

Some is in taxable stock index funds (primarly VG Tax managed accounts) and a few individual stocks. We will have control over when to sell these, depending on how the capital gains rates are affected. Or we can just hold them forever and hope the step up in basis will still exist to help our children.

Lastly, if you're concerned you can save a little more. Lots will probably change in the next 20 years, but you will be able to adjust along the way. You don't need to decide now and then star-trek-warp to the future.

[jmbkb4]

great posts by emergdoc....

I do not think that raising tax rates on the "rich" (those that make over the magical # of $250k) will solve the problem...

If one of the most radical congresses in history couldn't do it, it probably won't happen for quite some time.

[digit8]

2030 is my target retirement date. At some point you must guess what tax rates will be then...

In a sense, I honestly don't think it actually is necessary, let alone possible. Diversify for taxes the same way you diversify investment classes, for much the same reasons.

[Lake Living]

I would enjoy hearing others thoughts on how they anticipate tax rates in or around 2030.

-Rex

My expectation is tax rates will be higher at some point, probably in the 2014-2024 time period. They will start a downward trend resulting in tax rates in 2030 that will be much lower than they are today.

[nisiprius]

Even if you assume "taxes will go up," it doesn't necessarily mean income tax and it doesn't necessarily mean your tax will.

--It could be a flat tax by then.

--It could be a more steeply graduated by then, say 20% to 91%. It was when I was a kid, it could be again.

--There could be a national sales tax by then.

--There could be a value-added tax by then.

--The capital gains tax break could be eliminated by then--or it could be "half the earned-income rate" as it once was--or it could be even lower.

--They could invent something altogether new by then.

I think it's pure futility to try to guess 20 years into the future. You don't even know what the name of the President will be, let alone her party affiliation, how can you even guess what his tax policy will be?

William Sherden in "The Fortune Sellers" noted that the accuracy of predictions must always be tested against the simplest prediction, which is "the same as it is today." It is simply staggering how few kinds of forecasts are actually any better than "the same as it is today." About the best are weather forecasts and even they aren't much better.

For tax rates, I think "the same as it is today" is a reasonable planning number because nothing else is likely to be any more accurate.

[Manbaerpig]

if taxes aren't higher, I argue inflation is the reason why. Not much difference either way