Why the Iowa Caucuses Made Me Love the Roth IRA

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How about those Iowa Caucus results? Bernie Sanders and Hillary Clinton ended up in a virtual tie, and the top three Republicans finished within a few percent of one another. Looking at the entrance polls on CNN last night, I had a random financial thought and realized I really needed to share it with you. Last night’s Iowa causes just made me love the Roth IRA. Here’s why.

Bernie Sanders Makes Obama Look Unpopular with Millennials

I will tie all this together at the end, but what Bernie Sanders was able to do is really important for financial planning. If you look at Iowa polls on election night, Bernie had the most dominating performance among young people of all time in the Iowa caucuses.  Looking at CNN’s Iowa entrance polling, Sanders won 84% of Millennials age 17-29. By comparison, President Obama in 2008 won 57% of that same age group. Obama dominated Hillary Clinton among younger voters. Sanders obliterated her. I looked for other entrance polling for Iowa primaries and could find nothing that comes close to the share of this age group that Bernie won over.

Here’s why this is important. I don’t believe Bernie is a one time phenomenon. His message really appeals to a slice of the American public, and it really appeals to young Democrats. His attacks on income inequality, Wall Street, and the rich send his followers into a frenzy, especially folks that sympathize with Occupy Wall Street. His desire to make college and healthcare basically free inspire passion and massive numbers of small campaign contributions, just like Obama in 2008. Sanders is farther to the left than any major presidential candidate in history, and young Democrats support him at a higher rate than the populations of many dictators around the world.

Why did gay marriage suddenly become way more popular, and even socially awkward to not support, in the past 10 years? It’s because every year members of the older generation died off and were replaced by voting age young people who are extremely pro gay rights. The same phenomenon seems like it could be true for redistributionist politics. When 84% of a demographic group reject a center left candidate who supports capitalism and free trade, there is a major ideological rift between old and the young on the Democratic side.

Taxes Will Be Really High Under President Sanders, And Not Just For the Rich

All of Bernie’s policy positions are very openly presented, along with how he will pay for them. He is a very honest man. Sanders is a democratic socialist, and as such he advocates for extremely high tax rates, especially for the rich. However, the middle class will see big increases in their taxes too, regardless of what fiction the Sanders campaign spreads. Income tax brackets will likely stay the same nominally, but he introduces a lot of new surtaxes that will increase the overall bill. After all, regardless of whether you call it Income Tax or Social Security/Medicare FICA Tax, the net result is more money for the government and less money in your pocket. Most middle class people are in the 25% tax bracket for federal income purposes. To this, we add the 6.2% Social Security tax and 1.45% Medicare tax that already exist. Sanders would add a 2.2% income tax to replace healthcare premiums and a 6.2% new employer tax to fund some of his programs. I believe employers will either cut wages or lay people off to pay for this new 6.2% tax, so I will add it into the total tax bill. This excludes state and local taxes by the way, so the marginal tax rate for folks earning as little as $45,000 in the Northeast would be close to half their income. Anyhow at the federal level, the average person’s tax rate would be 25+2.2+1.45+6.2+6.2 = 41.05%.

A great piece of journalism by the Wall Street Journal looks at Bernie’s tax proposals. The WSJ finds that Sanders would raise taxes by 27 times as much as Hillary Clinton. He makes her look like a conservative Republican by contrast. Yet, Democratic millennials are ‘feeling the Bern.’ He is a well mannered and likable man, but he’s no Bill Clinton or Ronald Reagan. He doesn’t have inspirational rhetorical skill like Barack Obama either. What he does do is articulate a very extreme economic agenda very well. He’s also not an egotistical man compared to most candidates for President. In other words, people are voting for the ideas, not the man. There isn’t a cult of personality around Bernie. Rather, he has inspired a political movement.

Just as gay marriage became popular over time, socialist policies seem destined for a similar future. As older, more conservative voters die off and younger voters take over this republic, the median voter appears like she will become more liberal.

Bernie’s Iowa Showing Among Millennials is Why You Should Love the Roth IRA Too

The crux of the issue is if more people support socialism, taxes will go up. In fact, they will go up a lot. Bernie wants to increase capital gains and dividends taxes by almost TRIPLE. He wants the top income tax rate to almost DOUBLE. Young people are flocking to him, and thus the future will have much higher taxes. It’s as simple as that.

How do you prepare for this world? In terms of retirement, you have two major choices for saving. You can contribute to a Traditional account or a Roth account. A Traditional account allows you to save tax free upfront and a Roth account allows you to pay no taxes when you pull the money out many decades in the future. Generally you decide between the two by determining if your taxes will be higher today or in retirement.

However, with the rise of Sanders and socialist politics, the probability that your taxes will be higher many years from now versus today just skyrocketed with the numbers we’re getting out of Iowa. It’s looking like the median voter in 20 years is going to want a lot more government programs and higher taxes than the ones today. Sanders wants huge new social programs and will pay for them with massive new government tax revenue. Lots of people are supporting him, and young people love him. If you haven’t heard about all the benefits of opening a one already, the Iowa caucuses just made me love the Roth IRA even more.

Do you think Sanders strong showing can be extrapolated to America’s political future? What do you make about his historic success with young voters in Iowa? Would future expected tax increases make you more enthusiastic about contributing to a Roth IRA? Comment below!

4 thoughts on “Why the Iowa Caucuses Made Me Love the Roth IRA”

  1. I think you’re right, but for the wrong reason. You take a big leap when you look at how Bernie Sanders performed with one group (very young Democrats) in one state (Iowa, a small state), and extrapolate that across the entire polity in the long term. But, I do agree that we’ll see higher tax rates in the longer run, making a Roth much more attractive than a traditional IRA. I think as our population ages (and continues to strain Social Security and Medicare), and our budget deficit continues to slowly grow, we’ll have to do two things to cut that deficit–raise taxes and cut spending. It won’t necessarily be out of choice (i.e, we’ll just prefer higher taxes as a policy choice, a la Bernie), but it will be out of necessity (can’t borrow for perpetuity).

    1. Nate silver at fivethirtyeight.com had a good piece recently on the increasing polarization of the parties. Democrats are more liberal but Republicans are also way more conservative. We shall see if the Iowa result was a one off, but if it was it was the largest margin of victory among young people for a contested Iowa caucus in history. Furthermore, that group went for the most liberal major presidential candidate in history. I think we ignore Bernie’s shocking showing at the peril of the middle class and upper middle class’ future retirement incomes.

  2. But what if future policy finds a work around way to tax Roths? Essentially double taxation. Roth benefit could be clawed back.

    1. It could be, but not likely that the tax exemption will be lost . More likely that they make you empty it like a traditional IRA and remove the tax free transfer ability to heirs. Most employers offer traditional 401ks and leave out the roth option. A person using both would be able to have tax diversification in retirement. Having significant balances in both types of accounts could only be to your advantage

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