Skip to comments.Tax Reform Should Encourage More Saving, Not Less
Posted on 11/02/2017 5:19:19 PM PDT by Kaslin
Republicans want tax reform, but their refusal to cut spending forces them to look into all sorts of revenue raisers. Some are good, such as eliminating the deductions for state and local taxes. Others are counterproductive, such as the threat to significantly decrease the tax deduction on 401(k) accounts, potentially reducing the overall levels of savings for the millions of Americans using them.
Instead, they should keep the deduction intact, hence encouraging savings -- and in addition create universal savings accounts. There are rumors that they are considering such a move.
First, let me complain about the no-good proposal to reduce the 401(k) tax deduction from $18,500 to $2,400 and expand Roth individual retirement accounts in their place.
I like Roth IRAs; don't get me wrong. Like 401(k) accounts, they are a good way to avoid double taxation of income that is saved. A Roth IRA allows you to save after-tax income and withdraw the income from that savings tax-free in retirement. A 401(k) allows you to save tax-free today but will tax you tomorrow when you consume the income from your savings.
Because there are no upfront tax savings with a Roth IRA, people tend to save and consume in a fairly neutral manner.
By contrast, 401(k) plans tilt people toward saving for retirement by allowing them to reduce their tax bills now. To experts who worry that Americans don't save enough, these accounts are important because they increase savings for 62 million users. Reducing the deduction, they fear, could lead to a reduction in savings.
And yes, 401(k) plans mostly benefit middle- and upper-middle-class savers. But these taxpayers will also bear much of the burden from inevitable policy changes to address the insolvency of Social Security when the trust funds eventually dry out.
This potential move is annoying for another reason: It has nothing to do with improving retirement savings and everything to do with Republicans' search for revenue. That's what happens when you give up entirely on spending cuts as a way to pay for tax reform.
In this case, the tax writers are resorting to a budget gimmick that would not raise overall revenue but instead shift the tax collection from tomorrow to today. In other words, revenue collection might increase today but would shrink tomorrow -- as would our retirement security.
Instead, they should leave 401(k) deductions untouched and go a step further to supercharge savings with the creation of universal savings accounts. The good news is that House Ways and Means Committee Chairman Kevin Brady recently suggested to Politico that his committee could do just that.
Chris Edwards of the Cato Institute has been calling for the creation of USAs since 2002, and for good reason. Their hugely successful implementation in Britain and Canada has increased financial security and flexibility for millions of average families.
USAs are similar to Roth IRAs in that people contribute after-tax income. After that, all earnings and withdrawals are completely tax-free.
But the beauty of USAs is that they are for all types of savings, not just retirement savings. Savers are taxed once, and then they can put money away without arbitrary restrictions based on what it's for and when they may use it.
No more having to wait until retirement to use your money, so if you had an emergency, you could take out money without a penalty. No more having multiple accounts for multiple purposes and multiple filing requirements. No more having to justify every single dollar you spend from your kid's 529 account to show the IRS that those college books are indeed a legitimate use of the money you saved. The privacy benefit alone is huge.
USAs, in addition to 401(k) accounts, would add to personal financial security. And more savings would help the economy because when people save, they expand the amount of credit available for companies and innovators to start or expand businesses. Thus, savings are a powerful source of economic growth.
There is one potential risk with Roth IRAs and USAs: Future governments may change the rules on us down the road when they are even more desperate for revenue than they are now. They could, for example, renege on their promises of tax-free withdrawals and start double-taxing Roth IRAs and USAs. This is another reason to preserve 401(k) accounts.
Apart from that, here is to hoping that Kevin Brady will listen to Chris Edwards.
Article is fairly pointless at this point since 401k wasn’t touched.
How many conservatives? Three?
What a bunch of crap!
Find me a single example of Big Govt Inc.... working for the middle class.
1} We don’t believe you.
2) ... because you lie to us.
3) You’re not sincere in your empty promises
4) You’re the reason Donald Trump was elected.
Not our fault. The blame solely lies at your feet.
401K’s were created in 1986 with the Grahm-Rudman budget reconciliation act.
Prior to that, you saved after taxes and you only paid taxes on the capital gain (if any) and could spend that money any time you liked for any reason.
This idea that we need to encourage people to save puts money into 401(k) that are invested in the stock market because there is no place else to put it.
Eliminate the 401(k) account in it’s entirety and let people save in the fashion that suits them.
Remember when the democRATS were advocating seizing all 401(k)’s and converting them to some government bond? Why would they think this way unless they thought that the money in these accounts was theirs because of the special tax exemption created to grow the money at a faster rate. Don’t think for a nano-second that if they democRATS ever come back into power, they have already got some program in a drawer somewhere ready to pull out when the time is right for them and seize every nickel in those accounts.
Before 1986 there were no penalties for early withdrawal, no need to justify emergencies or anything else.
This program needs to end and the money in those accounts should be distributed to the account owners. They can make good on the taxes due for the exempted period, or better yet, waive the taxes as it is tantamount to theft.
I’m sure Fidelity and T.Rowe Price will be hating life, but this is one program that while on the surface seems like a good deal, it’s really not. It’s not your money until (if) you reach 59 1/2.
Tax reform should be about Life Liberty and the Pursuit of Happiness. It wasn’t the govt’s to begin with, and it’s not about tricking me into doing this that or the other with MY money.
A reasonable amount of my money needs to go to state, local and federal taxes. I elect leaders to prudently dictate that amount. If I disagree, I’ll elect them OUT.
Thank you, you beat me to it.
agree, 401k is a pyramid scam.
Let’s get the Trump tax packaged passed first and then after the midterms let’s go further, I would like to more about the pre 86 stuff. I like the sounds of it.
Could you use the savings to buy a house or a business or help your son of daughter thru trad apprenticeship?
It was your money...period.
I worked for GE, which had the the S&SP plan. The way that program worked (up until 1986) was you put money in as a percentage of your gross pay. The company matched up to 7% and they held it for three years. Then it was distributed to you in year four. So you got a check (or stock shares) every year thereafter for as long as you were a participant. It was great. No questions, no BS, it was mine. I could withdraw early but I would forfeit the company match.
In 1986 this was converted into a 401(k) and they held on to it and you could contribute to it before taxes (or after).
It was great and I still have the shares which were distributed to me before the account was seized by the Graham-Rudman Act.
No, it isn’t.
yes it is.
Who the hell can save when the goddamned local real estate taxes to pay for communist teachers is so high? Have to use home equity loan to pay the feaking taxes. Oh yeah, land of the free.
No it is not, by even the most ridiculous definition of the term. You are investing in the same stocks or bonds whether its a 401k, IRA, normal trading account or a PE fund. The only difference is the first two have massive tax advantages compared to the first two. Now if you are trying to argue the entire stock market is one, you’d still be nuts, but closer to having a point.
“Some are good, such as eliminating the deductions for state and local taxes.” Can someone explain how it’s good to eliminate a deduction for money you’ve already paid taxes on once?
I understand....believe me, I do.
I pay $10K/ yr in property taxes... $3k to the county, $7k for the schools.
Let’s put 10% of your pre-tax earnings in an account you can’t touch for 30 years, I will give you one million dollars and tax you then when you retire. Oh if you need it along the way I can give it to you pennies on the dollar. You got to invest this untouched money in the stock market or just put it in to cash where you can earn .04 percent interest if that’s the going rate. And by the way you can take a loan out if it will make things easier.
Thats about like me... over11K.
You left off the fact I get to save 35% of what I put in immediately in taxes, I get 50% match by my company, it grows tax free, and if I leave my company I can transfer it to an IRA for free and invest in anything I want. Oh, and if its my only income in retirement I barely pay any taxes on it. Also, while I’m still at my current company and must invest directly into a 401k before IRA rollover, I have 30 different options to choose from, including 4 small cap, 3 mid cap, 4 large cap, 3 international funds, a few other types of stock funds, 3 bond funds, 5 target date funds and a handful of MMA funds to choose from, most of which have fees of less than 0.3% annually. Not as many options as an IRA but certainly good enough. I can also do SEPP withdraws well before 59.5 if I want without penalty as well.
Paying tax on your house is like paying extortion to the mob. Nice house ya got there. Sure would be a shame if we had to evict you and confiscate it.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.