|I saw an article this weekend and it caused me to start taking deep cleansing breaths. Inhale through the nose and exhale through the mouth. I kept repeating this and did my best not to bang my head against my desk…over and over and over. The article was about how the White House and Congress are considering a massive change to the taxation of your 401k.Jason Zweig of the Wall Street Journal shared notes from a meeting between Gary Cohn, director of the White House National Economic Council and former President of Goldman Sachs, and members of the Senate Banking Committee. Their discussion involved ideas to remove the pre-tax benefits of retirement accounts, including 401ks, and shift them to after-tax benefits. Yes, you read that correctly – There is conversation occurring between the White House and members of the Senate to change one of the best tax benefits most of us have to save for retirement. The article did say no one knows how serious the administration is with such an idea. However, tax experts are confident it is only a matter of when before changes take place to reduce the tax benefit of contributions to retirement accounts.
The reason for this possible change – a desire for a massive tax cut. This tax cut has to be paid for somehow and your future seems like a wonderful option, doesn’t it? The problem the White House, their Goldman Sachs Vampire Squad, and Congress has with the pre-tax 401k contributions is they lose out on a lot of tax money right now. Estimates are if 401k contributions were treated like Roth IRA contributions where the money went in after taxes it would generate another $1.5 trillion over the next decade. That is hard for DC to ignore, especially when tax cuts are a cure-all, just ask the state of Kansas.
I have a couple of serious concerns with this concept. First, the retirement savings data for most Americans is abysmal. Odds are by taking away the tax incentive the numbers will only get worse. Let’s look at some of the information provided by Anthony Isola of A Teachable Moment.
Next, what happens to the current structure where growth and distributions in Roth IRAs are not taxed? Let’s assume 401ks are added to this world if they are structured like Roths with after-tax contributions. It becomes a slippery slope where our leaders could eventually start taxing Roths and 401ks so much they look just like taxable accounts where everything is taxed.
Hopefully this is one idea that will not gain any traction, but who knows. Again, it is most likely only a matter of time some change is made to how contributions to 401ks are taxed, but let’s hope there is some deeper thought put into the matter. In the meantime, who knows what the Goldman Sachs Vampire Squad will come up with. As a tweet I saw last week read – “They said if I voted for Hillary that Goldman Sachs would take over. They were right.”
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Dan Johnson CFP™ is the President and CCO of Forward Thinking Wealth Management, LLC, which is a flat-fee financial planning firm located in Akron, OH and set up to work virtually with clients across the country. He charges clients a flat fee of $4,800 regardless of asset size.
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