Feds eye your 401k.

#76
#76
McDad said:
I generally prefer tax credits to deductions. That proposal could be a good thing.
Punishing higher earners is the same play of economic envy out of the same 70 year old playbook. Higher earners have access to resources and experts to simply reallocate those funds to yield maximum return in spite of government rules.
Auto 401 for employees without access is another potentially good move.
I don't understand catch up contributions or why it would be limited to caregivers and how a caregiver is defined.
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I agree, but this is what concerns me...
The tax advantage of contributing to a 401(k) would be reduced for higher earners and increase for low and middle earners.
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So I guess if you make over a certain amount, the potential of you getting $0 tax credit is on the table...

They should just make the tax credit equal to whatever you contribute up to the 401k max limit.
 
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#77
#77
Rasputin_Vol said:
I agree, but this is what concerns me...
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It should. It's simply more "leveling of the outcomes" of different socio ecomomic demographics. It's stupid political pandering. Possibly creating more government dependency, too.
 
#78
#78
Is this the same as getting rid of 401k being drawn pretax? Or having 401k contributions as taxable income at the end of the year? Or am I not understanding what they’re talking about?
 
#79
#79
TheDeeble said:
Is this the same as getting rid of 401k being drawn pretax? Or having 401k contributions as taxable income at the end of the year? Or am I not understanding what they’re talking about?
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They will no longer be a pretax deduction. What it will do is be a tax credit... but only a 26% tax credit.

Under current tax law, employees can have a set percentage of their salary invested in a 401(k) and defer paying tax on that money until it is withdrawn from the account. This tax deduction provides the greatest tax break to people with the highest incomes. For example, an employee earning $70,000 a year at the 12% tax rate can put $10,000 into a 401(k) and the tax savings would be $1,200. But a higher earner making $450,000 annually at the 35% tax rate who puts the same $10,000 in a 401(k) gets a tax break of $3,500.

Biden's proposal would end the tax deduction for contributing to a 401(k) and replace it with a tax credit. "Biden is proposing making it an equal tax break no matter what your income level is," says Bryan Bibbo, lead advisor at the JL Smith Group in Avon, Ohio. "The proposed tax credit is 26%, whether you are at $70,000 or $450,000."
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So in other words, in that example above, if a person making $70k and another making $450k each contribute $10000 to their 401k, they will each get a $2600 tax credit...

$2600 for a $70k earner is a greater tax cut than for the $450k earner...

Again, if they are going to go this route, just make the entire contribution up to the annual limit a tax credit. Simple. For 2021, the limit is $19,500. A $19,500 tax credit if you max out is a good deal.
 
#80
#80
TheDeeble said:
Is this the same as getting rid of 401k being drawn pretax? Or having 401k contributions as taxable income at the end of the year? Or am I not understanding what they’re talking about?
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Seems like it would be 2 options:

Standard 401K: 401k as taxable income with (apparently 26%) tax credit for contributions

Roth 401K: no change from current (taxable income)
 
#81
#81
McDad said:
I generally prefer tax credits to deductions. That proposal could be a good thing.
Punishing higher earners is the same play of economic envy out of the same 70 year old playbook. Higher earners have access to resources and experts to simply reallocate those funds to yield maximum return in spite of government rules.
Auto 401 for employees without access is another potentially good move.
I don't understand catch up contributions or why it would be limited to caregivers and how a caregiver is defined.
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The argument for equality doesn't work. The higher earner can shield less of his income as a percentage than the guy making $70k while also paying a higher rate. Assume 10k contributions with a 35% rate for the $400k guy and a 22% rate for the $70k guy, $70k reduces his tax bill by 14% while $400k reduces his bill by 2.5%.
 
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#82
#82
Rasputin_Vol said:
They will no longer be a pretax deduction. What it will do is be a tax credit... but only a 26% tax credit.



So in other words, in that example above, if a person making $70k and another making $450k each contribute $10000 to their 401k, they will each get a $2600 tax credit...

$2600 for a $70k earner is a greater tax cut than for the $450k earner...

Again, if they are going to go this route, just make the entire contribution up to the annual limit a tax credit. Simple. For 2021, the limit is $19,500. A $19,500 tax credit if you max out is a good deal.
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I get your idea if it’s to encourage retirement savings and as a way to phase out social security.

But even if you didn’t contribute anything to a 401k, the IRS wouldn’t tax 100% of the $19,500 you chose not to invest.

Not sure how your idea would impact tax revenues, but seems like it would be very significant. A significant number of people would have tax credits higher than taxes owed and would essentially never pay income taxes.
 
#83
#83
So then at the end of the year if you’ve paid “x” amount into a 401k, when your taxes due is totaled, you would deduct another 2600 or whatever from that total taxes owed?
 
#84
#84
TheDeeble said:
So then at the end of the year if you’ve paid “x” amount into a 401k, when your taxes due is totaled, you would deduct another 2600 or whatever from that total taxes owed?
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26% of whatever “x” that was contributed.

If “x” was $10,000, yes
 
#85
#85
ajvol01 said:
I get your idea if it’s to encourage retirement savings and as a way to phase out social security.

But even if you didn’t contribute anything to a 401k, the IRS wouldn’t tax 100% of the $19,500 you chose not to invest.

Not sure how your idea would impact tax revenues, but seems like it would be very significant. A significant number of people would have tax credits higher than taxes owed and would essentially never pay income taxes.
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They've already shown they don't need tax revenues. Why should that be a concern?
 
#86
#86
TheDeeble said:
So then at the end of the year if you’ve paid “x” amount into a 401k, when your taxes due is totaled, you would deduct another 2600 or whatever from that total taxes owed?
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Yeah... or, 26% of whatever you contribute would be deducted from the taxes that you owe. If you contrbute $10k, you will get a $2600 tax cut. $19500, you get a $5070 tax cut.
 
#87
#87
I have to be careful how I explain this because it gets confusing going between tax credit and tax deduction...
 
#90
#90
I just wanted to add this is the beginning of the "means testing" for retirement. If you meet the qualifications for "high earner" whatever they'll be and you're in the top tax bracket, you're taking a 9% penalty for contributing to your 401k. And you can also bet your sweet ass when it comes time to withdraw you will be paying your full rate on that distribution, there won't be a credit for previous taxes paid. So this creates yet another stream of income that is taxed twice.
 
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#91
#91
DancingOutlaw said:
I just wanted to add this is the beginning of the "means testing" for retirement. If you meet the qualifications for "high earner" whatever they'll be and you're in the top tax bracket, you're taking a 9% penalty for contributing to your 401k. And you can also bet your sweet ass when it comes time to withdraw you will be paying your full rate on that distribution, there won't be a credit for previous taxes paid. So this creates yet another stream of income that is taxed twice.
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So contribute to a Roth 401k. Problem solved
 
#92
#92
ajvol01 said:
Tax Credit is equivalent to taxes paid

Tax deduction reduces taxable income
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That’s what I’m trying to math out in my head. Am I coming out on the worse end by going from less taxes paid each week with a lower taxable income at the end of the year, or higher taxes paid each week with a higher taxable income at the end of the year with the tax credit?

I tend to be skeptical of govt actions.
 
#94
#94
TheDeeble said:
That’s what I’m trying to math out in my head. Am I coming out on the worse end by going from less taxes paid each week with a lower taxable income at the end of the year, or higher taxes paid each week with a higher taxable income at the end of the year with the tax credit?

I tend to be skeptical of govt actions.
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Oh, I just ran the numbers on the back of a napkin for myself... I'm losing on this Biden plan.
 
#98
#98
ajvol01 said:
So contribute to a Roth 401k. Problem solved
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They need to make a IRA contributions the same as 401k contributions then. $6k max for an IRA when you can contribute something like $22k to a 401k is significant. My employer used to allow after tax deductions to my 401k but then stopped them shortly after I started using it.
 
#99
#99
When enough Americans have a large portion of their nest eggs tied entirely to the prospect of unabated corporate growth, who then has the leverage over the government? Especially when corporate growth is whittled down to the fortunes of just a hand full of companies, as the destruction of the regulatory apparatus has led to.

If your 40-60 yo with a substantial amount in your 401k getting ready to prepare for retirement, you definitely are going to vote and be politically aligned with whoever has the best chance of keeping your 401K high. Increasingly no matter how companies perform, their value will be inflated by more money getting pumped into the market, because it has no where to go. That makes P/E and EBITDA ratios continue to balloon, as we've seen for years. It also contributes to the market being completely untethered from the economy.
We're all "invested" in keeping the US economy and stock market high. Politicians and banks know this.


Stock returns are inversely correlated with economic growth and investment, but positively correlated with rising capital share.
A large portion of the US stock market value is capitalized oligopoly rent.

http://web.stanford.edu/~mordecai/OnLinePdf/Formation of Capital and Wealth Draft 10 5 5 2018.pdf

Economic growth and equity returns - ScienceDirect

Similar to housing as an investment vehicle to transform middle-class homeowners into guardians of the extreme housing shortage. Programs to build houses and bring down prices so middle to lower income families and young might be able to own a house? This is impossible now-- because the politician who proposes this says goodbye to the suburban homeowning vote.
 
#100
#100
VolStrom said:
They need to make a IRA contributions the same as 401k contributions then. $6k max for an IRA when you can contribute something like $22k to a 401k is significant. My employer used to allow after tax deductions to my 401k but then stopped them shortly after I started using it.
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Agree 100%

The Roth 401k also should allow participants to withdraw contributions tax-free for paying for college the same as a Roth IRA
 
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