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Thread: Potential changes re IRA and 401k tax favored gov't sanctioned retirement accounts

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    Default Potential changes re IRA and 401k tax favored gov't sanctioned retirement accounts

    from Time magazine ...


    (snip)"One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress would not be able to resist tapping it to help solve the nation’s debt problems. We’re about to find out if those fears—persistent for decades—have been justified.

    Everything including the sacred mortgage deduction is on the table as lawmakers wrestle with the fiscal cliff, a year-end avalanche of scheduled spending cuts and tax increases. With a combined $10 trillion sitting in IRAs and 401(k) plans, retirement accounts make a juicy target. Some of this money has never been taxed, and under current law never will be.

    To maintain this savings incentive the government “spends” $100 billion a year in the form of tax breaks to those who stash money in these kinds of accounts. Now, a new study suggests this tax incentive does little to change saving behavior. Some lawmakers, no doubt, are wondering: Why keep an expensive tax incentive that does not incent?

    The study, reported in The New York Times, comes from Raj Chetty and John N. Friedman of Harvard, Soren Leth-Petersen and Tore Olsen of the University of Copenhagen, and Torben Heien Nielsen of the Danish National Center for Social Research. It looked at data from Denmark, where the pension system is similar to that in the U.S., and found that every dollar that government spent on tax breaks increased total savings by about one penny.

    That’s not much of a payoff. Meanwhile, the Tax Policy Center in Washington has found that about 80% of retirement savings benefits flow to the top 20% of earners. Eliminating the deduction for retirement savings would hit the well-off disproportionately, a condition with a lot of appeal in the current political climate."(snip)

    (snip)"So hold on to your wallet. Congress has many options when it comes to tapping this vast reservoir. It could eliminate the deduction altogether or just for top earners, further restrict the amount that is deductible (currently $17,500; for those over 50, $23,000), start taxing retirement savings growth, or take back the part that has grown tax-free.

    In the throes of a retirement savings crisis, none of these options is appealing. But that last one is most troublesome. At stake is any savings that has accrued tax-free in a Roth IRA. Tax-deferred growth could be a target too if you find yourself in a lower tax bracket in retirement. There is no discernible momentum behind such measures. But a retroactive tax on this sheltered income has been a worry from the start. And now these accounts have a meaningful total—and everything is on the table.'(snip)


    This commentary is based on recent public hearings ... from the admittedly non-neutral

    (snip)A recent hearing sponsored by the Treasury and Labor Departments marked the beginning of the Obama Administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts including IRA’s and 401k plans, NSC is warning.

    The hearing, held in the Labor Department’s main auditorium, was monitored by NSC staff and featured a line up of left-wing activists including one representative of the AFL-CIO who advocated for more government regulation over private retirement accounts and even the establishment of government-sponsored annuities that would take the place of 401k plans.

    "This hearing was set up to explore why Americans are not saving as much for their retirement as they could," explains National Seniors Council National Director Robert Crone, "However, it is clear that this is the first step towards a government takeover. It feels just like the beginning of the debate over health care and we all know how that ended up."

    A representative of the liberal Pension Rights Center, Rebecca Davis, testified that the government needs to get involved because 401k plans and IRAs are unfair to poor people. She demanded the Obama administration set up a "government-sponsored program administered by the PBGC (the governments’ Pension Benefit Guarantee Corporation)." She proclaimed that even "private annuities are problematic."

    Such "reforms" would effectively end private retirement accounts in America, Crone warns. "These people want the government to require that ultimately all Americans buy these government annuities instead of saving or investing on their own. The Government could then take these trillions of dollars and redistribute it through this new national retirement system."

    Deputy Treasury Secretary J. Mark Iwry, who presided over the hearing, is a long-time critic of 401k plans because he believes they benefit the rich. He also appears to be one of the Administration’s point man on this issue.
    "This whole issue is moving forward very quickly," warns Crone."(snip)



    If there is a relevant take-away for dancers and camgirls, it is that gov't sanctioned IRA's and 401k's essentially involve committing your money to a 20-30-40 year financial 'game'. That financial 'game' involves an assumption that the current year income tax avoidance on money put into IRA's and 401k's will be greater than future year taxes due when that money is withdrawn after you retire. That financial 'bet' also involves an assumption that dividend and interest earnings on investments under an IRA or 401k 'umbrella' will not be subject to future taxes either.

    While this remains true today, it is a legal fact that the US courts have ruled the US gov't is under no contractual obligation to continue today's IRA and 401k 'rules' into the future. Or put another way, while a person may start playing the gov't sanctioned retirement savings 'game' under today's set of 'rules', the gov't is free to change those 'rules' at any time. And as the blurbs above point out, potential 'rule' changes already being discussed may involve retroactive taxes, may involve involuntary conversion of investments made under the IRA or 401k 'umbrella' into a new form of US treasury 'bond', may involve means testing of future Social Security benefits ( i.e. if you have saved for your own retirement via IRA or 401k contributions, you won't receive Social Security checks until all of your own IRA or 401k money has been spent ) etc.

    Bottom line point is that, like past truisms such as 'real estate only goes up in value', and 'getting a college degree will guarantee you a good job', younger dancers and camgirls must now question the truism that 'IRA's and 401k's represent a good deal'.

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    Default Re: Potential changes re IRA and 401k tax favored gov't sanctioned retirement account

    I think this thread raises some good points and there is no doubt that we could see some radical changes in the tax code. I also agree that there is no legal requirement that Congress continue deferred tax accounts. I find it difficult to believe that any change to those provisions would not come with some sort of provision that allowed people that already had their IRAs or 401ks to keep them. Anything else would be very hard to do politically given the amount of money in these types of accounts. I can think of two instances in history that a change in the tax code was so hated the Government essentially undid it and both times there was not this kind of money involved. A lot of things will be "talked about" but many of these suggestions will not get serious consideration. Every time Congress meets several people try to repeal the estate tax but those attempts never get very far and the estate tax still exists.

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