Author Topic: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class  (Read 1748 times)

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Offline Elderberry

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4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« on: September 23, 2017, 10:00:55 pm »
Madison.com by Sean Williams 9/23/2017

It's no secret, so let's just say it: We absolutely stink at saving money. Among developed countries, Americans have one of the lowest personal saving rates. According to the St. Louis Federal Reserve, as of July 2017, Americans were socking away just 3.5% of their disposable income, or $3.50 out of every $100 they earned, which is well below the 10% to 15% of earned income that financial advisors recommend workers put away for retirement and an emergency fund.

Saving such a small amount of their paychecks is leaving far too many people reliant on Social Security, which is struggling with its own issues at the moment, and it requires that workers invest flawlessly in order to have a sizable nest egg come retirement. The retirement path we're on as a country right now simply isn't sustainable -- and it could get worse.

Individual and corporate tax reforms come into view

During his election campaign, President Donald Trump promised the nation sweeping tax reforms, including a simplification of the individual U.S. tax code, as well as a lowering of the corporate income-tax rate. At a peak marginal tax of 35%, U.S. corporations are paying one of the highest income-tax rates in the world, which Trump believes is putting these companies (and the U.S. in general) at a distinct disadvantage. Trump has reiterated multiple times since becoming president, and during his campaign, that he would ideally like to see Congress pass a tax reform bill to lower the peak corporate income-tax rate to just 15%.

But there's a catch to putting more money into the pockets of corporations, which Trump and Republicans believe will boost the U.S. economic growth rate, lead to more hiring, and increase wages. Namely, it'll take about $2 trillion in federal revenue off the table over the next decade, at least according to estimates from the Tax Foundation, a nonpartisan research institute. In order for Trump's tax reforms to be revenue-neutral over the decade, he'd need to find a way to increase federal revenue by $2 billion.

One way Trump and his GOP colleagues are aiming to do this is by cost-cutting. Trimming the fat in Washington, and potentially reforming healthcare by cutting Medicaid spending substantially over the next decade, could markedly reduce the expected $2 trillion shortfall from cutting corporate income-tax rates.

Republicans are considering a big change to America's top saving tool

But cost-cutting alone wouldn't be enough, which is why the highly unpopular idea of making changes to the employer-sponsored 401(k) has crept into view. As of March 2017, 55 million workers had more than $5 trillion invested in 401(k)s, making it the top saving tool among working Americans.

The idea being floated around Capitol Hill is that lawmakers want to alter the tax treatment of 401(k)s, which are currently tax-deferred plans. In other words, money currently contributed to a 401(k) is considered pre-tax -- thus lowering your current-year tax liability -- and allowed to grow on a tax-deferred basis until you begin making withdrawals. Ordinary federal income tax becomes due when account holders begin taking money out of the 401(k).

Lawmakers are considering a change to make contributions to 401(k)s after-tax, thus taxing contributions up front and allowing account holders to take withdrawals on a tax-free basis when they retire. If this sounds familiar, it's because this is what a Roth IRA does (after-tax money growing over the long term on a tax-free basis). Pundits have suggested that this plan would "Rothify" the 401(k), giving the federal government more money up front to help cover its corporate-tax cuts.

More: http://host.madison.com/business/investment/markets-and-stocks/reasons-k-tax-reform-could-decimate-the-middle-class/article_a62d3c96-60fb-5df3-9652-692fa9bb7316.html

Offline dfwgator

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #1 on: September 23, 2017, 10:15:15 pm »
Sounds like a great deal for people who are nearing the age when they can start withdrawing from their 401(k)s.

Offline Elderberry

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #2 on: September 23, 2017, 10:20:11 pm »
Sounds like a great deal for people who are nearing the age when they can start withdrawing from their 401(k)s.

It wouldn't affect money that was already put in the 401K. If pre-tax money was put in, then that money would still be taxable when it's withdrawn.

Offline berdie

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #3 on: September 23, 2017, 11:25:29 pm »
I have thought they would do this for years.  They need the tax dollars.

Offline RoosGirl

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #4 on: September 23, 2017, 11:30:24 pm »
This is bullshit.  We know what our government does.  It'll be changed to post-tax now with no tax requirement at withdraw.... until a few years down the road when they need more money.  Then they'll change it to both.

Offline Elderberry

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #5 on: September 23, 2017, 11:34:50 pm »
I have thought they would do this for years.  They need the tax dollars.


Quote
Jerome Corsi ran an article on November 25, 2012 on WND where he stated:

Recent evidence suggests government officials continue to eye the multi-trillion dollar private retirement savings market, including IRAs and 401(k) plans, eyeing the opportunity to redistribute private retirement savings to less affluent Americans and to force the retirement savings out of the private market and into government-controlled programs investing in government-issued debt.


Oceander

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #6 on: September 24, 2017, 12:49:06 am »
What this does is impose a high tax rate on the income instead of a low tax rate.  Typically, the employee with a 401(k) is in the higher brackets when he or she is earning and contributing to the plan, and in a lower bracket when taking the money out in distributions.

Online IsailedawayfromFR

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #7 on: September 24, 2017, 02:36:34 pm »
Deflection.

Congress will make a big deal out of this as they cry about 'needing more money' as the deficit grows or 'loss of income' as tax cuts are implemented.

The elephant in the room is spending, not govt revenues.  Until that is the focus, there is no end to the govt grab for your money.

And 401ks and IRAs are a juicy target to exploit.
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Offline Sanguine

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #8 on: September 24, 2017, 04:34:25 pm »
Quote
In order for Trump's tax reforms to be revenue-neutral over the decade, he'd need to find a way to increase federal revenue by $2 billion.

Cutting federal spending isn't even a passing thought anymore.

Offline dfwgator

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #9 on: September 24, 2017, 04:52:53 pm »
Cutting federal spending isn't even a passing thought anymore.

In Washington-Speak,  reducing spending, is actually just reducing the rate of spending increases.

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #10 on: September 24, 2017, 06:52:20 pm »
What this does is impose a high tax rate on the income instead of a low tax rate.  Typically, the employee with a 401(k) is in the higher brackets when he or she is earning and contributing to the plan, and in a lower bracket when taking the money out in distributions.

Precisely, yes.  That was the whole purpose in making 401k tax deferred..Changing that would defeat the purpose of 401k.
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Oceander

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Re: 4 Reasons 401(k) Tax Reform Could Decimate the Middle Class
« Reply #11 on: September 25, 2017, 02:03:51 am »
Precisely, yes.  That was the whole purpose in making 401k tax deferred..Changing that would defeat the purpose of 401k.

The other point was to allow the funds to grow tax-free prior to distribution; that way, they would grow faster than if tax were deducted each year.