Congress is coming after your 401(K)
75% of Americans disapprove of the job our representatives are doing. It’s things like this that explain why:
While only about 13% of US employees nationwide enjoy a retirement fund that ensures stable income for life, all 535 members of Congress do… courtesy of Uncle Sam.
Members of Congress participate in the Federal Employees Retirement System, which provides pension benefits most working Americans can only dream of.
Private retirement savers often pay management fees that can exceed 1% per year for poor investment choices. Members of Congress pay a maximum of 0.039% for guaranteed funds to match the market.
A proposal floating around Republican circles in Washington would add insult to injury: They want to end the tax deduction of your pension contributions so they can give a $1.5 billion tax break to corporate America.
UPS.
Give and take
Congress is reportedly considering reducing the benefits of contributing to a 401(k) and similar retirement plans.
That’s because he wants to reform corporate taxes, cutting the rate from 35% to 15%. That punches a meteor-sized hole in the federal budget.
Cue the pension police.
According to the latest report from the Joint Committee on Taxation, the exclusion of contributions and earnings from defined contribution plans will cost the federal government more than $584 billion over the next five years.
The new proposal would treat all traditional IRA and 401(k) contributions as if they were Roth IRA contributions. You would lose the tax exclusion of those contributions, but your future 401(k)/IRA earnings and appreciation would be tax-free. Some think this could raise $1.5 trillion in additional tax revenue over the next decade, making corporate tax reduction feasible.
Unless they decide to tax retirement earnings and appreciation as well.
End of the Roth?
At this time, any income and earnings generated by your 401(k) and/or traditional IRA are not taxed until you make withdrawals.
But a new proposal would impose a 15% tax on those annual earnings, raising another $1.5 trillion over the next decade. However, that would be even worse than taxable ordinary investment accounts, where one can defer capital gains tax simply by not selling shares.
“It’s really not a question of whether retirement plans will be cut, but by how much,” said Bradford Campbell, a former assistant secretary of labor for employee benefits under President George W. Bush. Replacing lost income from tax cuts, he said, is “a game of winners and losers, and the retirement system is bound to be one of the losers.”
My sources in Washington tell me that the Trump team is definitely planning to push through tax reform like President Ronald Reagan’s in 1986, closing loopholes and lowering rates. It will not be just a tax cut, as had been rumored.
Like the exclusion of retirement contributions, the proposals also eliminate state and local income tax deductions. If you live in a place like New York or California, that’s a big deal.
Who cares?
There is no more controversial issue in American politics than federal tax reform. So who is likely to win and lose if tax reform follows President Donald Trump’s proposals?
First, his administration cannot count on the unconditional support of the voter base that put Trump in the White House.
Although low-income voters would likely be neutral, since they tend not to have 401(k)s or IRAs, households earning $50,000 or more, most of whom voted for president, would be hit hard if contributions for retirement were taxable. in the front.
High-income families probably don’t care one way or the other, as they tend to hit their retirement contribution limits pretty quickly anyway.
Second, the corporate side of the proposals is tense. Although Trump’s plan cuts the corporate rate from 35% to 15%, many US corporations already pay less than 15% thanks to the loopholes, especially in energy, utilities and heavy industry.
They will likely oppose the plan as it closes those loopholes. That makes the step uncertain.
How to prepare
The uncertainty surrounding something we’ve come to take for granted, tax-advantaged retirement plans, means you need to urgently look for alternatives.
One is to explore the benefits of investing directly in the stock market. Long-term buy-and-hold strategies may become more attractive than retirement funds, depending on how capital gains are treated in any tax reform plan.
Another alternative is to consider the advantages of life insurance.
Certain types of whole life policies are much better than traditional retirement vehicles. That’s because the IRS currently treats “distributions” from such policies as nontaxable loans against the policy, which are withdrawn when paid upon your death.
Life insurance trusts, on the other hand, could become much more attractive vehicles for transferring money to your heirs if returns on estate IRS accounts plummet.
Whatever happens, I will closely follow developments… and offer you solutions.