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One of the largest tax benefits Americans get comes from the exclusion from income of money that they save in 401(k) plans. According to the latest report from the Joint Committee on Taxation, the exclusion of contributions to and earnings of defined contribution plans cost the federal government more than $90 billion in potential tax revenue in 2016. Estimates have that number rising to $146 billion by 2020, and the total over the five-year period from 2016 to 2020 is almost $584 billion.
The key proposal Congress is reportedly looking at treats all 401(k) contributions as if they were Roth contributions. That would take away upfront tax benefits in exchange for making earnings and appreciation tax-free going forward. By doing so, the federal government believes it could raise $1.5 trillion in additional tax revenue over the next decade, providing an ample source of funding for tax cuts elsewhere.
Seems like a kicking the can approach. You can have it now or later, but either way it's not producing more revenue for them, just when they get access to it. As a person that lives on half of our income and invests the rest I would not like this at all, so I hope it does not pass.
I could be turning this into a generational wars post, but this is consistent with a book I had just read: [url]https://www.amazon.com/Generation-Sociopaths-Boomers-Betrayed-America/dp/0316395781[/url]
The Boomer generation has had a stronghold on the political class for several decades (and will continue to for awhile still). In their early years they were able to influence the political class (though they weren't yet in office themselves their sheer numbers were too enticing to voter-hungry politicians of the day). The book talks about this concept in avoiding the draft (I guess it was Ford or Carter that exonerated anyone who could have been guilty of avoiding the draft) and lowering the drinking age. I think it was during the Reagan years that they started messing with the tax code and deregulation. I'm sure many of you are more astute about that era than I am could say more, but I guess Reagan made it easier for middle class families and at that point, those middle class families were 100% fully comprised of Boomer parents.
So the book has predicted something of this sort: It's inevitable. The self-serving Boomer generation needs to prepare for the next phase of their lives, one that they didn't quite appropriately save for. I mean, if you think I'm a little harsh then avoid the book all together (if you're a millennial or Gen X you probably should read it though). He really comes out with guns blazing.
Don't underestimate this. Don't underestimate what this generation can still do.
What I do not like about the various government encouraged retirement systems is that it does not treat everyone equally.
Depending on how much (%) of the pay your fellow workers put in their 401k it can limit what you put in. Why? If you have a business you can put in more than you can as an employee. Should be one set of rules for all on how much you can put into a plan.
To what extent is the "lost" tax on current 401k contributions offset/replaced by the taxation of any current 401k withdrawal/distributions ?
The contributions vs distributions curves crossed over in 2014. $400 billion went in. $400 billion and change came out. Just about every penny of those distributions was taxable income.
Typically, the distributions are at a lower tax bracket than the money going in. The people maxing out their 401(k) contributions tend to be in at least the 28% bracket. The distributions tend to be in the 15% and 25% bracket.
What I do not like about the various government encouraged retirement systems is that it does not treat everyone equally.
Depending on how much (%) of the pay your fellow workers put in their 401k it can limit what you put in. Why? If you have a business you can put in more than you can as an employee. Should be one set of rules for all on how much you can put into a plan.
It's worse than that. I know lots of people who bump into rules where they can't contribute anything close to the maximum contribution because their employer has a lousy plan participation rate. If you work somewhere that most of the employees are lower income, that's pretty common. I've always worked in tech companies where that doesn't happen because most of the employees are high wage techies who pretty much universally participate in the 401(k) plan.
The contributions vs distributions curves crossed over in 2014. $400 billion went in. $400 billion and change came out. Just about every penny of those distributions was taxable income.
Typically, the distributions are at a lower tax bracket than the money going in. The people maxing out their 401(k) contributions tend to be in at least the 28% bracket. The distributions tend to be in the 15% and 25% bracket.
But that cross-over was proceeded by a huge amount of buffering, it just took until 2014 until the buffer was full and income = output. But there is trillions sitting in the buffer and that is part of what the Repubs want to get at.
It is a funny way to fulfill the Trump promise of lower taxes, to raise taxes. Doing so won't affect the Trump base because I don't see them as 401k people, so maybe Trump doesn't care. But it will affect a big part of the middle class. Still, I cannot see it happening.
This is what scares me about roth IRAs... Their attractiveness is as a tax hedge so you pay the piper now and avoid taxation on the gains in the future. IMO they will chase wherever the money goes. So you will end up paying both the tax now and later when they get greedy.
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