Call your congressman and tell him/her to not tax your 401(K)!
In the early stages of negotiating tax reform, Congress is already considering whether to reduce the benefits of contributing to a 401(k) and similar retirement plans
A reliable retirement is “a four-legged stool,” says David Kabiller, co-founder of AQR Capital Management in Greenwich, Conn., and co-author of a recent article on how to design retirement programs. Those four legs are a traditional pension, a 401(k)-type plan, Social Security and supplemental savings in taxable accounts. “Eliminate or restrict any of those,” he says, “and you make achieving a secure retirement more challenging.”
Yet that is what Congress, perched securely on its taxpayer-funded four-legged stool, is considering for the rest of us.
In the next round of tax reform, “it’s not really a question of whether retirement plans will get a haircut, but of how much,” says Bradford Campbell, a partner in the law firm of Drinker Biddle & Reath in Washington, D.C., who served as assistant Secretary of Labor under Pres. George W. Bush.
That’s because the money you contribute to 401(k)s and several other types of retirement plans isn’t subject to current income tax. Nor are your future earnings on those accounts — until you take them out to live on in retirement, when your withdrawals will be taxed as ordinary income.
If your retirement dollars were treated, instead, like contributions to a Roth Individual Retirement Account or Roth 401(k), they would be taxed before you put them in. You could ultimately withdraw the money tax-free in retirement, but the incentive of getting an upfront tax break would be gone.
Taxing retirement-plan contributions Roth-style would generate roughly $1.5 trillion over the next decade the way the government reckons the numbers, estimates Mr. Campbell. So giant a pot of honey may be hard for Congress not to raid.
“We definitely need comprehensive tax reform,” says Mr. Campbell. Unfortunately, when lost revenue has to be replaced, “it’s a game of winners and losers, and the retirement system is poised to be one of the losers.”
It’s hard for most people to save for a goal that glimmers faintly decades in the future. Take away the tax incentive, and many savers might no longer see the point of even trying.
Fully 39% of Americans don’t feel very confident in their ability to fund a comfortable retirement, according to a recent survey. It’s safe to say none of those worried folks are members of Congress.
Instead of penalizing retirement saving, lawmakers should be making it easier, perhaps even mandatory — as it is for members of Congress.
For workers struggling to set money aside, says Mr. Kabiller, “mandatory savings could help impose the discipline of giving up compensation today in order to fund your longevity down the road.”