Uncle Sam, in a desperate attempt to fix its $16 trillion-plus deficit, is leering over Americans’ retirement nest eggs as its new bailout fund.
Capitol Hill politicians are assessing tax changes that could let the Internal Revenue Service grab a portion of the $18 trillion sitting in 401(k) accounts and other tax breaks used by middle-class workers, including cutting the mortgage tax deduction, reports NyPo.
A commission looking for ways to close the deficit, and, noting the extent of 401(k) tax breaks, recommends an examination of the system as one way to prevent government bankruptcy.
Besides 401(k)s, other possibilities include the mortgage-interest deduction on second homes, as well as benefits from employer-provided health insurance, which are untaxed now.
Under current 401(k) rules, total employee/employer contributions can’t exceed $50,000. In the proposed rule change, employer/employee contributions would be limited to 20 percent of the employee’s compensation, with a maximum of $20,000, the so-called 20/20 proposal.
Another proposal being discussed in Congress says all tax deductions on 401(k)s and IRAs to be replaced with an 18 percent credit. The credit would be placed directly in a person’s retirement account.
Unlike the current system workers’ and firms’ contributions to employer-based 401(k) accounts would no longer be excluded from income and would be subject to taxation, contributions to IRAs would no longer be tax-deductible and any contributions to a 401(k) plan would be treated as taxable income.
In other words, the employee and employer would no longer get a deduction under the plan, they would qualify for a credit. The credit program as opposed to current tax breaks would increase government revenues by an estimated $458 billion.
Have they ever considered cutting the budget?
ReplyDeleteJust a thought.
The Democrats held hearings on this in late 2010 before they had to give up power to the Republicans in early 2011.
ReplyDeleteNext Congress is going to propose seizing 401Ks, IRAs and other tax free investments to put towards the debt and replacing the stolen monies with guaranteed government bonds that pay a few percentage points in interest.
Especially if there is another financial crisis and people lose a substantial percentage of their savings, American slaves will be clamoring for this.
I liquidated one IRA last year, paid the tax and penalty and plan to liquidate my final IRA this year. I'd rather keep some of my money rather than let the government seize it.
Just like u said, u paid taxes on it when u closed it out. If they tax it when we put it in, it is no longer taxable when we start pulling the larger amount that has grown out for retirement.They spin the current 401k plan as tax free but in reality we may not be taxed today on it only to be taxed later. But the employer doesn't pay taxes on it at all on it in the current system. Giving the weathly (your employer) yet another tax break.
DeleteHow much protection would converting a 401(k) to a self-directed IRA afford?
ReplyDeleteYou can't normally roll over a 401K into an IRA while you are still working at that company.
DeleteNot all companies have IRA's.
DeleteThe credit program as opposed to current tax breaks would increase government revenues by an estimated $458 billion.
ReplyDeleteDid the article say how much it would increase the costs? Taking my money only to a portion of it back to me will certainly increase tax revenues, but giving it back will increase costs.
I can't wait for the month when they run out of cash and say "we're suspending tax credit payments into your 401k. We'll get around to it when we've raised enough money to actually pay." A la what they do the government employee pension plan when Congress has delayed raising the debt ceiling. Come to think of it, that gives permanent support of raising the debt ceiling every time because a portion of that money is going directly into your 401k
I don't think switching to an IRA would afford much protection at all because the IRS is fully aware of IRA contributions. Lew Rockwell is right: do the opposite of what the gov encourages. That includes no establishment approved retirement vehicles. Gary North writes frequently on this subject. The bottom line is that you have little control and the money is there for them to tax and steal. Just like payroll withholding.
ReplyDeleteThis is the self directed IRA process of which I speak: http://www.tdvselfdirectedira.com/
ReplyDeleteWill private pensions be next?
ReplyDeleteSupreme Court has ruled that they can only tax 100% max. I feel much better knowing that there is a cap on all this taxing and spending!
ReplyDelete@Matt: the insanity knows no limit...
ReplyDeletehttp://en.wikipedia.org/wiki/Pomperipossa_in_Monismania