[dgildeh]

Thanks for the comment. I wasn't aware of that point on the high top marginal tax rate, I can only comment that it's been in place for a long time (since I moved here) and I don't get any sense personally that it will be expired when California is constantly looking for ways to increase taxes.

Re. healthcare, from past people I've hired and let go and friends who've been unemployed, perhaps as they're all in tech with higher incomes, it seems pretty accurate. I remember one employee had to setup Cobra to continue keeping their healthcare plan, and it was actually more expensive than what the company was paying for some reason! Terrible system in general...

Re. 401(k), I understand these are privately managed accounts, but the rules around them are dictated by the government, and can be changed as many countries are doing in general. And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans. I completely get the math of deferring taxes on your investments, and employer contributions, but I prefer to find other tax strategies that lock in tax savings today and also have more freedom around what we do with our money, these plans are pretty restrictive and I suspect will only get more restrictive in future as I mention in the blog.

With regards to my paranoia, I did link to a full blog on Privacy explaining that position, but specifically this attempt which fortunately failed: https://abcnews.go.com/Politics/biden-admin-backs-tracking-b...

I could be wrong, but this is one of many examples I've heard about since moving here, the general theme being they want more powers to get our data and audit us. Since moving here, our experience is the IRS is way more aggressive and invasive with tax filings and penalties than we ever experienced in the UK too. And don't even get me started on the exit tax, which for some reason kicks in after 8 years if you're on a green card, requires you to list every asset you have worldwide, and then pay capital gains on it, if you ever decide to leave the USA one day!

[stouset]

> And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans.

Sort of, but in practice not really if you're smart about it and plan a bit in advance.

If you want to retire early and access 401(k) or traditional IRA funds, you can do so without incurring additional taxes or penalties. The strategy is called a "Roth conversion ladder". It takes advantage of the fact that you can always withdraw Roth principal (not investment returns) before any retirement age penalty-free (as long as those funds have been in the Roth for at least five years).

The general outline is that you roll over some of your 401(k) or IRA funds into a Roth IRA every year. This causes those funds to be taxed as regular income tax, but your income is almost certainly going to be dramatically lower than during your earning years, putting you in a much lower tax bracket. This entire amount that was rolled over is now considered principal, and in five years you can use it penalty-free per the Roth rules. Every year you roll over what you expect to need in five years. Once you bridge that first five years (perhaps with preexisting Roth funds), you now have a recurring source of income through your Roth.

Yes, this is some additional complication and requires some planning. But it's not particularly onerous. GP is right that you're likely making a pretty big mistake, paying 40%–50% tax rates (on the marginal top end of your income) in order to avoid some restrictions that are—in most cases—pretty easily bypassed. That's not to say there aren't some very legitimate reasons for keeping money in accounts that don't come with restrictions, but paying 40%—50% in taxes for that privilege makes those situations comparatively rare.

I will absolutely agree that the fact that you need to know these sorts of "tricks" is one of many indefensible parts of our retirement system. And of course, there's always the risk of the rules changing out from under you. But cases where that actually happens in a way that causes significant impact are uncommon in practice.

[dgildeh]

Thanks for the info - funnily enough after I posted this I spoke to a tax strategist this morning who also laid out a bunch of things we could do to reduce our tax bill. The problem as you say, is this type of person isn't accessible to most people, and expensive!

[stouset]

/r/personalfinance is a phenomenal resource where this kind of info is freely available, and the advice therein more or less obviates the need for tax strategists and financial advisors for what I'd estimate is something like 80% of people.

There's even crazier options like the Mega Backdoor which require working at a company with an excellent benefits package. When combined with a normal Roth backdoor and an HSA, they allow a high earner to set aside $22,500 in a traditional 401(k) and $50,000 in Roth accounts, for $72,500 in tax-advantaged savings every year. With the information from my previous comment, this means that every year you do this equates to $50,000/yr you can spend in early retirement completely tax- and penalty-free

It's absolutely insane to me and also completely indefensible that simple access to this level of tax-avoidance is available to people based on their employer. Someone who earns the same level of income but at a different employer without a 401(k) only has the opportunity to set aside $6,500 (solely in a Roth IRA). And even doing that requires knowing about the backdoor "trick".

[thephyber]

The title of the piece is California versus UK, but lots of the complaints seem to be US versus UK.

Cobra is federal and was always a hack. We Americans need a complete healthcare rewrite, but there isn’t enough political will to get it done and we couldn’t even agree on what/how to change.

Cobra shifts all of the cost to the newly-unemployed employee, whereas previously the employer and employee shared the insurance premium cost and the employer side was tax deductible. It’s only more expensive than while employed because the person can’t deduct it from taxes, while the company could.

The parent of your comment mentioned Obamacare plans. Those plans (and Medicaid) require that you change your insurance policy, so depending on availability you may be able to keep your primary healthcare provider. The out-of-pocket costs vary depending on what you qualify for, but the change in employment allows you to move to a higher deductible plan (cheaper if you conserve your healthcare visits).

All US safety net programs assume the end user is a liar and/or thief so it is your responsibility to prove your need. The UK (and Germany and Japan) got to redesign their social contract in the rubble of WW2; the US didn’t. And WW2 was the reason we ended up with so much employer-sponsored healthcare —- which means being unemployed comes with losing healthcare. We would have far better job creation if employees were more willing to leave companies quickly rather than searching for the next job first or calculating how much Cobra runway they can afford.

[dgildeh]

Thanks, interesting point on WWII and the difference in outcomes

[BXlnt2EachOther]

re: CA marginal tax rates, IIUC they're "temporary" but in place through 2030 at least, and have already been extended once.

I am a bleeding heart liberal which doesn't come through in the below, but think this is one example of 'nothing as permanent as a temporary government measure'

Before 2012 the top CA tax bracket was the 9.3% one. CA was still one of the most progressive states (tax burden for mid-income folks and retirees is not bad, though cost of living is high), which means the state revenue is sensitive to the income of high-income Californians. Some of those incomes weren't doing so well in 2009-2011 with the GFC impact on tech, finance, maybe entertainment, execs living in the state, everyone's stock portfolios, etc.

Oh no, the schools are going to lose funding and the children won't be able to learn! Proposition 30 was proposed and raised sales tax for 4 years, and income tax for 7, via the creation of the 10.3-12.3 brackets; a 1M 1% surtax already existed. This was retroactive, raising taxes for the whole calendar year where it was on the November ballot.

https://en.wikipedia.org/wiki/2012_California_Proposition_30

Jerry Brown campaigned for it and stressed this was a temporary measure to get through these times, and it passed.

Four years later, in 2016... Did you know that if you don't act NOW then in a couple years there is going to be a big TAX CUT exclusively for rich Californians? Don't let this grave injustice happen, we need to fund schools so the children can learn! (and this time some other stuff like Medi-Cal and pay down the debt a bit).

https://en.wikipedia.org/wiki/2016_California_Proposition_55

I believe this makes them effective through 2030.

Next year, CA will lift the cap on the 1.1% CA employee payroll tax. I haven't followed this too close but think that means that californians making over $1M will be paying a 14.4% state marginal tax rate. Not that there's much sympathy for that group.

In 2025, the individual Tax Cuts and Jobs Act brackets will expire, with the top bracket going back up to 39.6%. Though I think Californians will be able to deduct their state taxes on the federal side once again (would not be surprised for that cap to return though).

I'm not necessarily opposed to these tax rates. I just wish having marginal rates over 50% would get us some form of universal healthcare.

[dgildeh]

Thanks for all the info - I would add Prop C to the list and almost added it as an example to the blog, which was meant to solve the homeless problem in San Francisco by essentially doubling the amount of money spent per homeless person from $40k/yr to $80k/yr by adding another tax for companies inside the city.

Not only has the homeless problem gotten worse since they introduced it, its also driven a few companies out of the city like Stripe, and in my opinion its the policies, not the funding which is the issue.

These are all examples of the government raising taxes, expanding, and not being accountable for any results that the increased spend was meant to bring