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Friday, October 21, 2011

Is Your 401-K or IRA Safe From “Deficit Reduction” Taxation?

President’s Super Committee Is Tempted

By Dell Hill

Publisher’s Note:  This blog does not give financial advice of any kind.  Opinions expressed here are solely those of the writers identified and linked so as to better educate our readers. Please consult your personal investment counselor(s) for your particular investment decisions.

With a super committee desperately searching for a fair method of extracting $1.5 trillion dollars in deficit cuts, some very low-hanging fruit has emerged.  And there’s been talk about this possibility for some time.  The problem now is time.  The President’s super committee has until December to come up with a plan and, thus far, most of the talk has centered around reconnoitering 401-Ks and IRAs for a substantial tax hit.

JOHN MERLINE, writing at INVESTOR'S BUSINESS DAILY, brings us up to date on the latest. 
Senate Finance Committee Chairman Max Baucus, D-Mont.

Is your 401(k) safe from the tax man?  That's a question that might be worth asking, as the congressional "supercommittee" scrambles to find $1.5 trillion in additional deficit cuts.

In September, the Senate Finance Committee held a little-noticed hearing that explored changes to retirement plans — principally employer-sponsored 401(k)s — that would in one way or another cut their tax deductions.

The tax breaks' size makes them a tempting target for lawmakers.  According to the White House budget office, tax exemptions for 401(k)s and IRAs will "cost" the government more than $436 billion over the next five years.

Senate Finance Committee Chairman Max Baucus, D-Mont., complained that "in spite of the tremendous tax preferences," Americans aren't saving nearly enough for retirement.

Critics say the existing system benefits mostly the rich.  The liberal-leaning Tax Policy Center calculates that 80% of these tax "expenditures" go to the top 20% of earners.

Such people "would almost certainly save for retirement even without tax incentives," said Karen Friedman, policy director at the Pension Rights Center.

But Judy Miller of the American Society of Pension Professionals and Actuaries argues that the deduction's cost is wildly exaggerated.  Adjust for the taxes paid when retirees withdraw money and the cost is cut in half.

And, she says, the break is more progressive than some allege.  Among other things, high earners who get a bigger tax break going in end up paying more in taxes when they take the money out.

"Contrary to the common myth, the tax incentives are not upside down at all," she said at the Senate hearing.  Plus, the current system has led to an explosion in retirement savings, with 401(k)s now holding about $4.7 trillion in assets and IRAs $4.9 trillion.

Still, proposals to cut the deduction and make it more "fair" seem to be gaining traction in Washington, including the White House.

One idea pitched at the Senate hearing is to replace the entire tax deduction with a flat government match of 18% to 30%.  The Brookings Institution's William Gale, who helped develop the idea, says if the credit were set at 18%, it would boost tax revenues by $458 billion over 10 years, mostly from wealthier workers.

President Obama's debt commission proposed cutting the annual cap on 401(k) employer/employee combined contributions to $20,000 from $49,000 now.  (The individual limit is $16,500 a year; workers age 50 and older can add another $5,000).

I realize that what you’ve read thus far is a pretty big bite to chew.  But if you’re serious about your retirement earnings, read the rest of this report by clicking here.

For me, what it all boils down to is a lot of “maybe”, mixed with a generous amount of concern.  Having full knowledge of the incredible shenanigans that resulted in Obamacare becoming law, I no longer trust anyone who holds public office to advise me on my finances, nor do I have any confidence that my retirement accounts are safe from the Democrats tax and spend thievery.  You can throw a few RINO Republicans into that mix, as well.

Just the fact that we’re talking and writing about this possibility is frightening enough. Consult your financial manager and keep both eyes peeled on Washington, D.C. 

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