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Congress takes aim at 401(k)s

By Jennie L. Phipps · Bankrate.com
Tuesday, May 31, 2011
Posted: 3 pm ET

Should Congress put limits or even completely do away with the tax incentives that make saving within a 401(k) or some other tax-advantaged retirement plan attractive in order to cut the deficit?

The Congressional Joint Committee on Taxation and the Treasury Department's Office of Tax Analysis conclude that these retirement planning programs will cost the federal government about $600 billion in lost revenue over the next five years.

Here's what they suggest instead:

  • Bipartisan Policy Center Debt Reduction Task Force -- Maintain existing accounts but cap tax-preferred contributions to the lower of $20,000 or 20 percent of income.
  • National Commission on Fiscal Responsibility and Reform -- Consolidate the various retirement accounts and cap tax-preferred contributions to the lower of $20,000 or 20 percent of income.

The American Society of Pension Professionals & Actuaries, or ASPPA, says the government's math is fuzzy because it doesn't accurately figure deferred revenue -- savers eventually take the money out and pay taxes on it. Based on its calculations, the government would only gain about 25 percent more in taxes and the price would be reduced income and security for people living in retirement.

A separate study by the Stanford University Graduate School of Business says that the introduction of 401(k)s has had an enormous impact on how people invest in stocks and bonds. At the end of World War II, individual citizens owned 90 percent of the stock market; by 2006, they owned only 30 percent. The other 70 percent was held by institutions, including mutual funds, insurance companies and pension funds.

Ilya Strebulaev, associate professor of finance and primary author of the study, recommends that tax reformers consider making the tax rate on capital gains equal to the tax rate on equities held in tax-advantaged accounts. Now, of course, the capital gains rate is 15 percent for most people -- less for low-income people, while the rate son equities in tax-advantaged accounts are the same as for ordinary income. This would level the playing field and potentially make it less attractive to hold stocks in a tax-advantaged accounts. He believes that among other things, holding stocks outside of institutional accounts would encourage individual investors to pay more attention to how their money is invested. "Institutional investors are very passive. They delegate their vote. It's not the best social outcome," Strebulaev says.

Strebulaev dismisses the idea of limiting the tax advantages of retirement accounts to increase revenue. "What I think what our research delivers is that all these small twists in taxation are very unlikely to work."

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533 Comments
M.
July 26, 2011 at 10:58 pm

If this happens there will be blood in the streets.

aliberalsaver
July 26, 2011 at 8:06 pm

To Chippy55,

In my family, I'm the hated liberal. I've worked for 38 years for the phone co(s) and have 1.3 million in my IRA/401K. My conservative NRA Republican husband quit working when we got married. He has only Social Security, no savings, and me for his retirement plan.

Heywood
July 26, 2011 at 7:49 pm

I don't get it. You're maximum pre-tax contribution to your 401(K) is $16,500. The only people who can put more than that in there pre-tax are people over 50 who I believe can put an extra $5,000 per year in, for a max of $21,500. So who is the $20,000 limit going to effect? It's going to trim $1,500 a year at most from people who are contributing that extra money. If they index it for inflation, I don't see how this effects anyone.

Joe
July 26, 2011 at 3:45 pm

Great post Virginia...... "Right on the money" you might say.

Joe
July 26, 2011 at 3:44 pm

You hit the bullseye Dee. Glad to see there are at least a few poeple out there who know whats going on. Can you imagine how much we pay in taxes just for the healthcare of government retirees, not to mention the increased costs of our own healthcare plans due to the the discounts given the government and big labor employees. The revolution is here.... whether anyone wants to believe it or not. Simply put, everyone wants a peice of the pie but there are only crumbs left, so they want us PRIVATE citizens to make them a new pie................It's not gonna happen!

Osamas Pajamas
July 26, 2011 at 2:02 pm

As usual, the debate is framed in terms favorable to our hijacker government. Letting me keep my money does not cost the government even "one" penny --- because they didn't give me my money. If I give them nothing, it costs therm nothing. We are ruled by armed force and by fraud by lying, bloodsxcking tax-eaters who pretend to be operating on our behalf and for our benefit while hijacking our wallets and our property and dictating the terms of our existence. Cut their budgets. Cap their ability to tax [hijack income] and spend. Send a balanced-budget amendment to the US Constitution to the states for approval. And hang any politician, bureaucrat, or government employee who lies or who in any manner attempts to falisify reality.

Pamela Phillips
July 26, 2011 at 12:33 pm

It is easy for Washington to make decisions that will hurt us, the retired, disabled, elderly. They are safe and so is their money. We have worked all our lives. Our husbands have survived Vietnam, and now are suffering medical issues relating to that service. So, WHY does the government think the elderly can AFFORD to lose these benefits? We LIVE on what we saved, we pay TAXES WHEN WE HAVE TO TAKE IT OUT. Give us a break.

Sarah So. Jersey
July 26, 2011 at 11:27 am

Any discussion of modifying 401k demands a history lesson in why this vehicle came to exist. Revisit the era when corporations declared bankruptcy and did not pay the pensions promised to their employees. Tell everyone about ERISA and the PBGC insurance fund. Tell the horror stories of mature dedicated employees who were fired just before qualifying for their pensions (something unionized public employees can't fathom). Tell the stories of employees who pensions just disappeared with their employer's bankruptcy. Don't forget to include discussion of the health of social security program and the standard of living it promises to geriatrics.

The government should institute retirement programs for public employees same as private employees - to level the playing field .. Where is THAT IDEA DISCUSSED ??

Virginia
July 26, 2011 at 7:39 am

The government should not have another cent of the investment income of ordinary Americans, nor should their ability to save be curtailed. Income from dividends and interest are taxed twice, once at the corporate level, then again, when retirees take distributions. Instead, cut gold-plated government pensions and health care benefits, bloated federal bureacracy, much foreign aid, waste and abuse in Defense Department, redundancies in agencies.

Dee
July 26, 2011 at 7:04 am

So for years we have been hearing that Social Security won't last for many more years and that people need to start saving for retirement on their own. Now---because Washington has seen fit to bail out these big Wall Street yahoos and allow them to give multi-million dollar bonuses, they want to tax the very thing they have been asking us to do. How about this? Everyone-top of the ladder on down-pays a flat 15 to 20% in taxes....period. Drop the rest of the tax on tax programs and this should bring in a healthy revenue. Of course alot of government officials would no longer have jobs.