"Generation Me" are a bunch of pompous, greedy, delusional narcissists... right?
Are You A Millennial?
See these people? These are millennials. These people, born in the late eighties and early nineties that are now twenty somethings looking for their way in the world. The ones that barely remember a time without WiFi, may or may not even have a job and coined their own color, millennial pink.
You most likely also know this guy. And if you're even mildly interested in politics, you know that a tax plan has been in the works in his campaign since day one.
But with all the roadblocks, setbacks and other proposals, sometimes all we know about the tax plan is: that it's confusing.
So what do millennials and President Trump's tax plan have to do with each other? Well, if you're a millennial, it could actually be very good for you.
Saving For Retirement
Millennials, have you been saving for retirement? Or have you been saving to get enough money together to get Postmates to deliver Chipotle to your door so you can continue watching Stranger Things?
We hope you're saving for retirement. Because President Trump's plans for your 401(k) carry some good news for you.
It's been reported that Republicans are considering the idea of capping pre-tax 401(k) contributions, and then only allowing the investments into a 401(k) to be made as after-tax contributions. This type of investment plan is a Roth 401(k).
Annual 401(k) pre-tax contributions would be capped at $2,400. Right now, they're capped at $18,000. These contributions are deducted from your paycheck, just as traditional 401(k) contributions are deducted.
The new cap makes it so that only $2,400 of the investments could be contributed to the 401(k) without taxes - taxes are taken out later, at the time of retirement. The rest of the money after the $2,400 would be taxed as the investment is being made, according to the Roth method.
The Harvard Business School studied Roth 401(k) accounts at businesses with 10,000 or more employees. The lead author of the study, John Beshears, explained how they saw this new savings plan benefitting people in the long run.
If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.
In the study, the researchers found that "most people don't think about taxes when deciding how much to save for retirement."
Savings in a 401(k) are traditionally cheaper, because you postpone paying taxes. With the Roth 401(k), you pay up front.
Less Now, More Later
So, less now, more later doesn't sound like the most satisfying plan for people who like instant gratification (cough cough, millennials.)
Millennials pay less on taxes. That's because the majority of millennials are in a lower tax bracket than older generations. That means they pay less on the money that goes into their Roth 401(k), and have a very long time until retirement to watch that savings grow.
They younger you are when you start saving for retirement, the better off you'll be. So when you're 80 you can go hang gliding in Bora Bora, instead of watching fishing on TV.