Abolishing traditional IRA, limiting 401k options

[Lizard Queen]

Guess the House Ways and Means Committee is considering some changes to your retirement accounts in order to help their budget.


www.marketwatch.com/story/your-retirement-plan-may-be-overhauled-to-finance-tax-cuts-2017-04-04?siteid=yhoof2&yptr=yahoo

They are proposing to eliminate the traditional IRA's and only allowing 1/2 of the yearly limit for 401k's to be pre-tax.  What do you think?

[Value Buy]

I think the traditional IRA served it's purpose at the beginning of the process. Time to switch to a Roth IRA set up for everyone and pay the taxes up front.
When retired, some people have to pull more money out than they need to cover the federal and state taxes they now have to pay, thus lowering their total money pool faster than thought of.

[buystoys]

I can't find anything stating that this 2014 proposal has been revived?  Maybe I'm missing something?

[Rob Base 2.0]

I'm just interested that this was a possibility for 2014? To fund what, I wonder?

Either way I am against it. More choices for retirement options is better. Wouldn't that be a republican position anyway? Personal accountability with your choice of retirement account and all that?

[Deleted]

Personally, I think they should raise the limit for the IRA.  It doesn't seem fair to me that people that don't work for an employer that offers a 401K they're only allowed to save $5500/year in a tax advantaged account.  Maybe get rid of workplace plans entirely or just say you're allowed 18K either in a Roth or Traditional workplace or personal IRA combined. 

[midjd]

It seems short-sighted to me (shocking). As the article points out, tax revenues will temporarily be higher, but once a big contingent of Boomers starts retiring, they'll be a lot lower... and I'm guessing these tax cuts are not going toward payment on the national debt. 

In 20 years, the country will be even more irrevocably indebted, the revenue stream from 401(k)s will be drying up as Millennials and the next generation are taxed out the wazoo to support SS/Medicare so they can't afford to contribute to their own retirement, and they'll need to tweak the rules yet again.

Or they could go to something simple and universal, like MPL suggested. But that will never happen.

Gee, I'm cheerful this morning...  

[giramomma]

We'll see. I don't see it going anywhere. This is really directed at people that earn 6 figures or more..and I'm guessing folks that are mid-late career. So, it could be  that the gov't is sticking it to the over 50-55 crowd. There's no upper middle class and wealthy folks will take this without a fight.

We sit at about 70-80K of income. We simply cannot fully fund retirement (36K) if we want to live somewhere other than the hood. So, we'd never have to worry about the limits of how much you can put in an 401K to begin with. Even with 18K of traditional space..for a couple making 100K. That's still almost a 20% income reduction.

I find it curious that things like HSA were not mentioned, as well as what it means for 403bs and 457s plans...or what it means for workers like myself, that have access to both a 403b AND a 457. (At my state job, I can fund both if I ever were in a position to do so). And like it or not..most folks are using HSAs as retirement saving vehicles.

I could see it pushing higher income folks to asking for HDHP/HSA type plans.

I could also see it driving more people directly to the stock market themselves. If the gov't starts going after the HSAs in terms of taxes...I could see us adding more to our taxable account. Our AGI is low enough that we don't pay taxes on dividend income.

ETA: It could also be a way to let businesses stop contributing to retirement plans all together. It's the perfect set up, really. Workers complain that any employer contributions to a traditional 401K gives them less space to save. Business says "Great. We're done contributing."

ETA : What would be really interesting is to see what effect this would have on family size and housing choices.. Aside from retirement, the only substantial tax breaks people have is kids. I know I said above that older people will likely get hit..but...even people in their early 40's could too. An extra kid does wonders to your tax liability. I wonder, too, if some folks would opt out of the workforce. We tell people all the time to work, even if your net income equals child care costs, in large part because one is still saving for retirement in tax advantaged spaces..

[Bonny]

Apr 4, 2017 9:45:01 GMT -5 midjd said:

It seems short-sighted to me (shocking). As the article points out, tax revenues will temporarily be higher, but once a big contingent of Boomers starts retiring, they'll be a lot lower... and I'm guessing these tax cuts are not going toward payment on the national debt. 

In 20 years, the country will be even more irrevocably indebted, the revenue stream from 401(k)s will be drying up as Millennials and the next generation are taxed out the wazoo to support SS/Medicare so they can't afford to contribute to their own retirement, and they'll need to tweak the rules yet again.

Or they could go to something simple and universal, like MPL suggested. But that will never happen.

Gee, I'm cheerful this morning...  

Lol, but I agree with you.

I hate to say that people can be stupid (including intelligent ones!) but one thing I've observed is that people will do almost anything to save on paying taxes even if it doesn't make sense.

Getting people to save for retirement by deferring taxes is one of those social engineering tools. Shouldn't have to do it but...

My prediction is if this change is implemented then most people will only contribute to the traditional and not the ROTH thus overall there will be less money saved. 

[saveinla]

If there is no tax benefit to saving in a 401K, then I would stop my contributions completely and switch to a taxable account where I have control of the money, instead of locking it in a Roth 401K. I am discplined enough not to touch it and it will also be easier to control what it should be invested in.

[phil5185]

Personally, I think they should raise the limit for the IRA. It doesn't seem fair to me that people that don't work for an employer that offers a 401K they're only allowed to save $5500/year in a tax advantaged account. Maybe get rid of workplace plans entirely or just say you're allowed 18K either in a Roth or Traditional workplace or personal IRA combined.

Or they could go to something simple and universal, like MPL suggested. But that will never happen.

In about 1980, it was a simple straight forward idea to encourage Americans to save/invest. But 30 years of congressional "improvements" has muddled it and  turned it into an almost unworkable system. Now we have Trad 401k, Roth 401k, Trad IRA, Roth IRA, 403b, 457, SEP, Simple IRA - and several contribution limits depend9ng on age, income, self employed, etc. 

I hate to say that people can be stupid (including intelligent ones!) but one thing I've observed is that people will do almost anything to save on paying taxes even if it doesn't make sense.

So true. People will avoid earning more money (OT etc) because they think it will push them into a higher bracket. And they will buy tax-free bonds, even when the taxable bonds would NET more income for them. And they will purposely seek low-income jobs so that their loans will be forgiven - and so on. Lots of 'shooting ourselves in the foot".

[souldoubt]

Before the government does anything that raises tax revenue they should try working with what they already bring in and not use deficit spending as a way of life.  As usual they're looking at short term fixes for what are long term problems.  Aside from the normal lip service (think of the children!) I can't think of any elected officials who really do think long term and want to stop screwing future generations.    

[hoops902]

Apr 4, 2017 12:43:29 GMT -5 souldoubt said:

Before the government does anything that raises tax revenue they should try working with what they already bring in and not use deficit spending as a way of life.  As usual they're looking at short term fixes for what are long term problems.  Aside from the normal lip service (think of the children!) I can't think of any elected officials who really do think long term and want to stop screwing future generations.    

That's part of the nature of our system though. I think most people if faced with this at their job behave this way. If you can take a long-term approach and be fired soon, or just give people what they want because they're mostly short-term thinkers and keep your job...eventually you just throw your hands up and give the people what they want which is a bad idea for them in the long run. After a long enough period of time, anyone who thinks long-term is gone, and all the short-term folks are left. Politicians are like this because frankly, their constituents are like this. Politicians simply represent their people.  When people as a whole actually care about screwing future generations, politicians will vote in line with that.  The reality is that people may say they care about the future, but their actions show they care about themselves right now instead. 

[souldoubt]

I don't disagree and it's largely fueled by the instant gratification people have become accustomed to with everything at our fingertips due to technology and easy credit. That instant gratification has the country supporting a lifestyle that it can't afford long term.  No individual, family, business, state, country or planet is going to thrive if they can't think long term and make wise and many times tough decisions that have long term implications.    

[teen persuasion]

Sounds to me like they are getting afraid of the early retirement community.  Go Curry Cracker, Mad FIentist, Mr Money Mustache, etc, are all promoting saving as much as possible into traditional accounts, and some into taxable accounts, retiring early, and then setting up schemes to slowly draw that traditional/taxable money out in amounts low enough to trigger few taxes.  No huge RMDs after 70 1/2.


For most people, I don't think this will change things much.  How many average people contribute more than half their limit to a traditional 401k?

I wouldn't like it - I have no 401k option, and we heavily contribute to DH's to compensate.  Limiting his traditional contributions to $12k would cut our refunds by $2500, thus cutting our Roth IRA contributions.

[Deleted]

In addition to this I predict:


1.  There will be an early withdrawal penalty holiday to allow folks to convert their existing Traditional Accounts to Roth, and pay the taxes to do so using the accounts.

2.  1 will eventually become mandatory.

3.  In 19 years when the gov finds themselves short again they find a way to tax Roth's for a second time, perhaps by moving to a national sales tax instead of an income tax.

[phil5185]

Before the government does anything that raises tax revenue they should try working with what they already bring in and not use deficit spending as a way of life. As usual they're looking at short term fixes for what are long term problems.

I've noticed that when the Media wrings their hands about "more deficit", they talk only about static effects, never the dynamic effects.  Eg, they say that lowering the tax RATE by 2% will cause a 2% loss of REVENUE.  But that depends on how many of the 95,000,000 unemployed/underemployed go back to work  - jobs, jobs, jobs.    95M workers, each earning $40,000 is almost $4 Trillion per year, the Fed Income taxes and Payroll taxes from $4T will cover that lost 2% by about 10X.  Of course, Trump can't get jobs for 100% of the 95M - but just a partial success can maintain 'revenue neutral'.

My guess is that the writer of the article is dreaming - Paul Ryan and the Ways & Means have way more smarts than that.

[Plain Old Petunia]

Apr 4, 2017 8:44:29 GMT -5 Lizard Queen said:

Guess the House Ways and Means Committee is considering some changes to your retirement accounts in order to help their budget.


www.marketwatch.com/story/your-retirement-plan-may-be-overhauled-to-finance-tax-cuts-2017-04-04?siteid=yhoof2&yptr=yahoo

They are proposing to eliminate the traditional IRA's and only allowing 1/2 of the yearly limit for 401k's to be pre-tax.  What do you think?

I think it is bass-ackwards.  There are a whole lot of people who have no access to an employer plan, and they want to take traditional IRAs away?  Eliminate the 401k, boost traditional IRA limits, make them separate from Roth IRA limits.

[Deleted]

Apr 4, 2017 15:03:06 GMT -5 @aj said:

In addition to this I predict:


1.  There will be an early withdrawal penalty holiday to allow folks to convert their existing Traditional Accounts to Roth, and pay the taxes to do so using the accounts.

2.  1 will eventually become mandatory.

3.  In 19 years when the gov finds themselves short again they find a way to tax Roths for a second time, perhaps by moving to a national sales tax instead of an income tax.

I know.  I have a small Roth but am suspicious that when I withdraw from it they'll find a way to tax it- maybe through the back door by including it in the basis for taxation of SS and Medicare IRMAA surcharges. 

I'm against anything that discourages saving for retirement.  There are enough people around whose retirement plan is "Live on Social Security and qualify for Medicaid if I need a nursing home".  Let's not increase their number.

[phil5185]

I have a small Roth but am suspicious that when I withdraw from it they'll find a way to tax it-

If the US switches from Tax on Income to Tax on Sales, that will cancel the Roth benefits. Ie, you will be able to cash out your Roth money tax-free (as well as any other money - salary, etc). But when you buy something the Federal Sales Tax (expected to be in the 21% range) will be applied.

[beergut]

Employees could contribute up to half the maximum annual elective deferral amount (in 2017, the standard limit is $18,000; with catch-up contributions for those 50 and older, it is $24,000) into a traditional account, but any contributions in excess of half of these limits ($9,000 and $12,000, respectively) would be required to go to a Roth account. Employees could choose to contribute up to the entire annual limit to a Roth account. Employer contributions would continue to go to traditional accounts.

Notice the lost tax deduction only hits employees, not employers? Taking this to the extreme view, this is another way of forcing employees to pay the brunt of taxes while letting corporations avoid paying their share. 

[whoisjohngalt]

I just have to laugh......

I spent the last two months looking at hundreds' W2s.....anyone who thinks people are saving max in their 401Ks are delusional. Even people who are making well into 6 digits.

There is a very slim chance that slashing 401K limits will raise revenue that much for the govt.

So, once again - it will only hurt responsible people while not really accomplishing the intended purpose. Yay for our brilliant govt!!

[Deleted]

Apr 5, 2017 22:14:32 GMT -5 whoisjohngalt said:

I just have to laugh......

I spent the last two months looking at hundreds' W2s.....anyone who thinks people are saving max in their 401Ks are delusional. Even people who are making well into 6 digits.

There is a very slim chance that slashing 401K limits will raise revenue that much for the govt.

So, once again - it will only hurt responsible people while not really accomplishing the intended purpose. Yay for our brilliant govt!!

I knew a payroll specialist and they told me I wouldn't believe all the high paid people with constant 401k loans, not just they had them, but many defaulted.

[Plain Old Petunia]

Apr 5, 2017 14:14:39 GMT -5 beergut said:

Employees could contribute up to half the maximum annual elective deferral amount (in 2017, the standard limit is $18,000; with catch-up contributions for those 50 and older, it is $24,000) into a traditional account, but any contributions in excess of half of these limits ($9,000 and $12,000, respectively) would be required to go to a Roth account. Employees could choose to contribute up to the entire annual limit to a Roth account. Employer contributions would continue to go to traditional accounts.

Notice the lost tax deduction only hits employees, not employers? Taking this to the extreme view, this is another way of forcing employees to pay the brunt of taxes while letting corporations avoid paying their share. 

The employer will deduct the expense regardless of the tax treatment to the employee.

[beergut]

Apr 12, 2017 0:11:47 GMT -5 Plain Old Petunia said:

Apr 5, 2017 14:14:39 GMT -5 beergut said:

Notice the lost tax deduction only hits employees, not employers? Taking this to the extreme view, this is another way of forcing employees to pay the brunt of taxes while letting corporations avoid paying their share. 

The employer will deduct the expense regardless of the tax treatment to the employee.

If the employer contribution was forced to go to a Roth account, though, they wouldn't get the tax deduction. By allowing the contribution to continue to go to traditional accounts, they are allowing employers to retain the tax deduction. 

[Blonde Granny]

Apr 5, 2017 9:50:45 GMT -5 phil5185 said:

I have a small Roth but am suspicious that when I withdraw from it they'll find a way to tax it-

If the US switches from Tax on Income to Tax on Sales, that will cancel the Roth benefits. Ie, you will be able to cash out your Roth money tax-free (as well as any other money - salary, etc). But when you buy something the Federal Sales Tax (expected to be in the 21% range) will be applied.

Wouldn't that 21% be fun.  Add on my total sales tax in NW Arkansas @ 9.75% and I'd be paying over 30% every time I made a purchase.  Sheesh!!!!!!

[Deleted]

Apr 15, 2017 3:26:45 GMT -5 beergut said:

Apr 12, 2017 0:11:47 GMT -5 Plain Old Petunia said:

The employer will deduct the expense regardless of the tax treatment to the employee.

If the employer contribution was forced to go to a Roth account, though, they wouldn't get the tax deduction. By allowing the contribution to continue to go to traditional accounts, they are allowing employers to retain the tax deduction. 

If the employer contributions weren't deductible what employer would ever offer them?  All other compensation is deductible as a business expense, so it would make more sense to switch to a deductible annual bonus or some other benefit instead.