Your Tax-Free Nest Egg May Not Be Tax-Free After All

[Geee]

Investors Business Daily:

Duplicity: More than 30 years ago, lawmakers made a deal with Americans: Set up a retirement nest egg and we'll let you fill it with tax-free money. A financially troubled Washington now plans to break its word.

Nothing brought ordinary Americans into the world of investing like 401(k)s. Named after a subsection of the Internal Revenue Code, these retirement savings accounts have become a wildly popular alternative to traditional employer pensions, and are today owned by a sizeable majority of Americans at or near retirement.

Through 401(k)s, an employee — not the company he or she works for — decides just how aggressive or cautious he wants to be with money set aside for the autumnal years. Employers usually offer a series of stock, bond and money market investment funds, allowing a worker to choose and mix as he or she likes.

Not only would Americans see their own retirement accounts grow as the years passed, but they could rest easy knowing that the interest earned in their 401(k) won't be taxed before withdrawal at retirement time — or, in the case of the after-tax dollars in a Roth 401(k), that their money can be withdrawn tax-free.

But it's not the '80s anymore. It's 2012 and there are trillion-dollar-plus deficits to deal with, more than $15.6 trillion in outstanding government debt, and total U.S. unfunded liabilities of more than $65 trillion. Time for politicians to start looking for new sources of revenue.

[clearvision]

OK. On quick read I don't see the dreaded we are going to tax your retirement accounts that already exist. That would be VERY VERY bad and a major breach of faith in government. It seems to say they might change the rules on 401K contributions. That, although pretty bad, is fair game and why you need to elect the right people to office.

 

Maybe I'm missing the intent though and their plan is to tax 401K income already in the account, the article is somewhat muddied.

[Geee]

Sounds like they are talking about future contributions to me also-but that means that along with leaving our kids with all the bills, we are making it harder from them to ever retire from paying them

[Rheo]

Sounds like they are talking about future contributions to me also-but that means that along with leaving our kids with all the bills, we are making it harder from them to ever retire from paying them

It isn't really clear, but it would not be the first time they make it retroactive...by years.

spit and hiss.

[Argyle58]

401(k)s were not set up as a boon to workers, but as a sop to offset the repeal of government mandated pension plans, and allowing corporations to recall their contributions to employee pensions. I am not a fan of the free lunch philosophy, but the 401(k) concept was introduced as a lesser option to a social contract created for the working class by legislation, Had the government merely allowed the cessation of pensions at the time and introduced 401(k)s as an option for the future, I would have been fine with it. But, in creating the 401(k) option, the government allowed companies to dissolve their pension plans and keep the employer contributions to said plans, leaving thousands, many close to retirement, with minimal, or no, retirement incomes other than Social Security.....another soon to be broken social contract.

 

I have stated before in this forum that I am not a big fan of Ronald Reagan, and this is the primary reason. In this TARPesque move, which he supported and signed into law, many people are currently living much lower standards of living after retirement than they had planned, based on government promises.

 

The upside is that these are merely concepts being discussed and not proposed legislation presented in the article. The downside is that more dire concepts are also being discussed....such as the nationalization of existing retirement plans.

[saveliberty]

Having worked in the retirement industry, the correct classification is tax deferment. The Roth concept was set up to pay taxes now and to avoid taxing the base income and cap gains and dividends later.

 

At the time that Roth 401ks were offered, I was long gone from the retirement industry, but we knew that a) this would be temporary, because politicians can't help themselves and good luck on the cap gains and dividends, too, again because politicians can't help themselves.

 

To the point that @Argyle58 was making, I have to disagree. Pensions are difficult to sustain as they are a guaranteed benefit. Even before the economy tanked, the Pension Benefit Guarantee Company was not able to keep up with the volumes of pensions going belly up. A rule was put in place that even well funded pension funds would be required to pay higher premiums.

 

Meanwhile, our unionized friends were ignoring their actuaries and refusing to make changes for union pension plans. CalPers is a good example. The actuary went public that the pension was vastly underfunded. Union leaders ignored him and soon afterwards then Speaker Pelosi was attempting to nationalize individuals' 401k and other retirement assets.

 

An added point is somehow, magically, union leadership plans are 75% funded, while rank and file only are 50% funded.

[saveliberty]

BTW how will people who work still be able to get a pension, considering that the way the economy is going, people will need to change employers to keep working?

 

That was an argument made by Dr. Leon Strong (Stanford) on behalf of engineers when he proposed the idea of an IRA to President Richard Nixon. Nixon did not like the idea.

 

Good thing someone went over his head.

[Argyle58]

 

 

To the point that @Argyle58 was making, I have to disagree. Pensions are difficult to sustain as they are a guaranteed benefit. Even before the economy tanked, the Pension Benefit Guarantee Company was not able to keep up with the volumes of pensions going belly up. A rule was put in place that even well funded pension funds would be required to pay higher premiums.

 

Meanwhile, our unionized friends were ignoring their actuaries and refusing to make changes for union pension plans. CalPers is a good example. The actuary went public that the pension was vastly underfunded. Union leaders ignored him and soon afterwards then Speaker Pelosi was attempting to nationalize individuals' 401k and other retirement assets.

 

An added point is somehow, magically, union leadership plans are 75% funded, while rank and file only are 50% funded.

 

I am not, nor have I ever been, a supporter of the pension system. My complaint, then and now, was not the end of that system, but the fact that the government allowed companies not just stop, but to liquidate existing pension programs, a practice that left 10s of thousands of employees suddenly starting at square one in their retirement planning. Many of these employees were near retirement age, with little or no time to provide a substitute income for their retirement years. This left many people in the late 80's and early 90's forced to continue to work well into their 70s or beyond instead of the easy life that they had planned and worked for.

[saveliberty]

@Argyle58, thanks for the clarification.