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Limiting future 401K investments???
Old 11-13-2011, 06:16 PM   #1
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Limiting future 401K investments???

Looks like the pensions of working folks are not the only thing that may be under attack these days. Divide and conquer, then get them all fighting each other in a race to the bottom.

Don't Mess With My 401(k)! - Total Return - WSJ
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Old 11-14-2011, 08:48 AM   #2
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To summarize, the two prongs to these proposals modifying 401k contributions and taxation are:

1. Removing tax exemption for 401k contributions and instead offering a tax credit (the study authors analyzed an 18% credit and a 30% credit calculated on the amount of 401k contribution).

2. Capping employer plus employee contributions to $20,000 or 20% of income, whichever limit is lower.

If both of these proposals were enacted, this could almost be a wash for us. Our combined state plus federal marginal tax bracket is currently 22%. We would likely have a few dollars taxed at the 32% combined bracket if we were limited per the 20/20 plan (our taxable income would rise by about $20,000). A bigger unknown would be what, if any, tax deductions and credits we currently received would be impacted by a higher AGI.

However if the credit we receive is 30% of all contributions, that would more than offset the 22% combined tax we currently pay. But we will lose out on roughly $20,000 in tax exempt 401k contributions which means $20,000 more each year in taxable accounts, and the future stream of taxes owed on dividends and cap gains from those taxable investments. Overall I think I would stick with the status quo and not change things up. If anything, I would like to see all taxpayers be allowed to take advantage of the extra $5000 per year catch up provisions, so that people of all ages (well those over 21 anyway) could save for retirement on an equal footing.

From an equity/fairness perspective, it impacts those who have only defined contribution benefit plans most severely, while leaving those with only defined benefit plans free of any impact. Guess who typically relies on DB retirement plans the most? Unionized workers and government employees. The cynic in me says that protecting unions and govt workers at the expense of private sector employees is no mere coincidence.

Again on the equity/fairness side, it would most severely impact the highest income earners (per the study at the link provided), since their contributions would be capped lower than they are now, and they are also in higher income brackets, so a flat 18% or 30% credit wouldn't go as far to offset the higher rates they are currently avoiding by using a 401k. The study also points out the lowest income group is also significantly impacted, but I didn't dive in to understand why. Maybe their government benefits in the form of medicaid, food stamps/WIC/free/reduced lunches, rental assistance/housing, earned income tax credit, etc would be hit really hard. I'm not sure if they even looked at those second order effects of this proposal (so many govt benefits are tied to AGI or the like). For working poor, there is an income range where additional income has an effective marginal tax rate much greater than 100% (ie earn $2000 more and lose $5000 in government benefits).
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Old 11-14-2011, 03:48 PM   #3
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The impact of the proposed changes will vary with one's income, age and tax bracket. What bothers me is this: First, most people have been changed from defined benefit to defined contribution plans that use 401-k accounts (sometimes against their will and contrary to what was good for the employees). Second, these changes may results in less taxed advantage 401-k savings for many.

Having done away (rightly or wrongly) with the traditional defined benefit plan, some are now planning to water down the defined contribution plans. The race (or is it a push) to the bottom continues.
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Old 11-14-2011, 04:31 PM   #4
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FUEGO,

Did the article say whether these changes would apply to 403b's as well?
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Old 11-14-2011, 05:21 PM   #5
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Quote:
Originally Posted by Chuckanut View Post
The impact of the proposed changes will vary with one's income, age and tax bracket. What bothers me is this: First, most people have been changed from defined benefit to defined contribution plans that use 401-k accounts (sometimes against their will and contrary to what was good for the employees). Second, these changes may results in less taxed advantage 401-k savings for many.

Having done away (rightly or wrongly) with the traditional defined benefit plan, some are now planning to water down the defined contribution plans. The race (or is it a push) to the bottom continues.

One of the things that I learned in another thread.... that just because something looks like a DC plan... it might not be.... when I worked at mega, the did a change to DC... IOW, they would put a % of your salary in the plan... someone pointed out that it was still a DB plan... they really never did get rid of it, just made it look like a DC plan....

I did not read the article, but I would think that if the plans were still DB even thought they looked like DC... they would fall under the DB rules...

But, who knows for sure....
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Old 11-14-2011, 07:22 PM   #6
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Most people I know with a DB pension pay something into it.

The first pension plan I was a member of with mega-corp had a defined benefit plan fully paid for by mega-corp. When I moved to the public sector I was surprised to find that 6% of my gross pay went towards my pension. Still mega-corp would have required me to uproot my family and move to a place neither of us wanted to live. So, the change was right for me.
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Old 11-14-2011, 09:06 PM   #7
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Originally Posted by youbet View Post
FUEGO,

Did the article say whether these changes would apply to 403b's as well?
I didn't see 403b's or 457's mentioned in the article. I participate in a 457 as well as a 401k. For my analysis I assumed the 20/20 limits would apply to 457's similar to 401ks. I'm not as familiar with 403b plans and their limits.
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