Author Topic: Don't Touch My 401(k)!  (Read 120 times)

Offline Queensryche

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Don't Touch My 401(k)!
« on: October 28, 2017, 04:31:39 AM »
There's talk that Congress could possibly lower the pre-tax cap for 401(k) (and similar) plans to as low as $2400, with contributions after that being post-tax, in order to pay for tax cuts they want to pass. This is something that should be concerning to everyone, and I'm going to explain why.

401(k) plans are designed to encourage people to save for retirement because as it stands right now, a person can put up to $18,000 ($24,000 if they're 50 or older) in pre-tax money into the plan. Because the money put in is pre-tax, it reduces a person's taxable income. Save enough and you end up with a lower tax bill because your taxable income isn't as high and you get a refund of tax you've already paid. Lowering the pre-tax cap is going to screw over tons of people because they won't get nearly the tax benefit they do now, thus ending up with a higher tax bill. Further, it may encourage people to NOT save, because if they're not going to get a benefit, why bother? This will screw those people down the line when they don't have enough money saved up for retirement.

I've already passed $2400 in contributions. If this is lowered, I would be screwed because now I've suddenly got a higher income and a higher tax bill. Now in my situation this is somewhat mitigated because I could put money towards a Traditional IRA and get a deduction on what I contribute. Since employer-sponsored retirement plans (401(k), 403(b), etc.) and IRAs have separate thresholds for saving and don't interact, I can do this. However, there's a few problems.

1. The maximum for an IRA is $5500 ($6500 if you're over 50 years old)
2. Your income needs to be below a certain amount to claim a deduction

Right now my income is below the threshold to claim a deduction. However, someone like my dad would be screwed because his income is above that threshold, so he'd be putting post-tax money in a pre-tax account, and when he withdrawals it, he'd be paying taxes on it again. Lowering the threshold would especially screw over people who've already got Traditional IRAs and above the threshold, because then they wouldn't be able to do a Backdoor Roth IRA without paying taxes. To explain: Backdoor Roth is when you make too much to contribute to a Roth IRA and too much to take a Traditional IRA deduction. You contribute to a Traditional IRA, convert it to a Roth, then fill out IRS Form 8606 to report your Traditional IRA contribution as post-tax so that your conversion isn't taxed. The problem is that if you already have pre-tax money in your Traditional IRA, you can't just convert the post-tax money. It's converted pro-rata, or in proportion to how much money in your Traditional IRA is pre-tax/post-tax. So someone like my dad would be screwed over even more, because he'd get almost no tax benefit.

If you have any further questions, I can answer them. But hopefully I made this clear enough for you all to understand. Please, call your Congressperson/Senator and tell them DON'T TOUCH MY 401(k)!
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Online Scotty

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Re: Don't Touch My 401(k)!
« Reply #1 on: October 28, 2017, 05:52:34 AM »
I'm up in Canada, so not affected by this, but I feel like our government is making similar changes in that their thought process is "we'll let the future  worry about it" - and that sucks!

Also, unrelated to the 401(k), but I've noticed a monumental shift in retirement age and planning. Gone are the days when you worked 30 years, retired at 65 and died 10 years later. Many are choosing to work past age 65- to keep social, to keep their mind sharp, then there are some that are working because they have to. But all this doesn't change the fact that we're living longer and need to save and plan for that because regardless of government, no one wants to live the lifestyle that social programs provide for.

Offline Queensryche

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Re: Don't Touch My 401(k)!
« Reply #2 on: October 28, 2017, 06:51:31 AM »
I'm up in Canada, so not affected by this, but I feel like our government is making similar changes in that their thought process is "we'll let the future  worry about it" - and that sucks!

Also, unrelated to the 401(k), but I've noticed a monumental shift in retirement age and planning. Gone are the days when you worked 30 years, retired at 65 and died 10 years later. Many are choosing to work past age 65- to keep social, to keep their mind sharp, then there are some that are working because they have to. But all this doesn't change the fact that we're living longer and need to save and plan for that because regardless of government, no one wants to live the lifestyle that social programs provide for.

You guys up North have RRSPs. They're very similar to 401(k) plans. Thing is, you guys are increasing the limits one can save, whereas here they're talking about drastically slashing what you can save as pre-tax contributions to fund tax cuts.

As for retirement age, I can agree. My grandfather retired from the Army at age 60. My dad's turning 60 this coming January and he's nowhere close to retiring. He might make more time for himself and my mom as he gets older, but unless health issues prevent him, I don't see him as one to retire fully. He'll probably hand leadership of his company over to someone else and stick around as a regular employee. I think I'm similar, mostly because I've gone through unemployment and it sucked. Even if I don't have to, I'd want to work as long as possible just so I have something to do. I'm saving for retirement under the assumption that I won't retire until I'm at least 70 years old, barring health issues, and even then I don't consider that to be set in stone in any way.
A man once asked "Are Harry Winks and Eric Dier better than Jack Wilshere?"
The answer is "Well, yeah."