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1 year ago

Massive Tax Change to 401ks?

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.

  • Less than 10% of people with a 401k get a 5% dollar-for-dollar employer match.
  • Retirement savers are overcharged by $17 billion by financial salespeople.
  • 47% of Americans between 55-64 have NOTHING saved for retirement.
  • The 53% who do have something saved have a median account balance of $100,000.
  • More than 50% of Gen X has less than $10,000 saved.

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.”

Forward Thinking Wealth Management, LLC is an Investment Adviser registered with the State of Ohio. Please contact us at 330-835-6205 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions.  Additionally, we recommend you compare any account reports from FTWM with the account statements from your Custodian.  Please notify us if you do not receive statements from your Custodian on at least a quarterly basis.  Our current disclosure brochure, Form ADV Part 2, is available for your review upon request. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.

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.

Contact Dan: [email protected]   (330) 835-6205

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1 year ago
  • Guest

    What an Awful idea! I sure hope this doesn't go through

    May 4, 2017      2:47 pm Reply
  • Patricia Paz Lagos

    So what is the big deal? Everybody knows that the problem with the 401k plan is that you put the money in now before taxes, but years from now when you take the money out, the tax rates are higher — and as a result it isn't as good of a deal as say, a Roth IRA, where you pay the taxes now, and then take the money out tax free in the future. Changing the 401k to a Roth IRA style of taxation would make it better, not worse for investors. This is why financial advisers tell you to max out your Roth IRA contributions before contributing to a 401k (after the company match portion of the 401k, that is — as the company match portion is free money and should always be first).

    May 11, 2017      4:41 pm Reply

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