Their proposal would end my ability to put up to 20% of my pay into a 401-k without any of it being taxed. They would instead limit my contribution to 5% of my pay, which presumably would not be taxed.
If I had been making a full 20% contribution, that would increase my taxable income from 80% of my take-home pay to 95% of my take-home pay. That is a tax increase.
If I want to save more money for retirement I’ll have to use after-tax dollars — but I’ll also pay taxes on the money when I withdraw it, so it will be taxed twice.
Furthermore, they would force me to put the 5% into an account with a guaranteed return of a whopping 3%. 3 freakin’ percent. Over the long haul you can average 8% a year in any decent index fund, but they’ll instead limit me to a 3% return. Over 30 years you’ll end up with a nest egg that’s about 2.4 times as large with an 8% rate of return.
Your 401-k will be worth 42% as much under the Dem proposal as it would be with more normal investments. Oh, but let’s not forget that if you invest the other 15% of your income you’ll lose roughly 40% of it to taxes, so the now after tax money you invest on the side will be worth 60% as much.
In other words, suppose you make $60,000 in 2008 dollars (constant dollars to simplify). Under current law you could put $12,000 a year into an 8% return on investment index fund 401-k and you’d have $1.36 million after 30 years.
Under this proposal, you’d be allowed to put $3,000 a year in tax-free, returning 3%, for a total of $140,000. If you put the other $9,000, after taxes, into an index fund, you’d have to discount that by a roughly 40% marginal tax rate. So that $9,000 would turn into about $610,000.
So the Democrats’ proposal would turn your $1.36 million retirement nest egg into $750,000. And all that in the name of “protecting you” from risk. Some proposal. And it’s an absolute lie to say it would not be a tax increase.
If and I mean a big if <P. There will be an underground economy.
One correction: I forgot about the $600 the government would kick in. That extra $600 a year would add an extra $30,000 to that nest egg over 30 years.
So instead of $750,000, the government’s very generous $600 (taken from what? Our higher taxes due to the reduction in our 401-k tax break) would increase our haul to $780,000.
And that’s assuming that you face a 40% marginal tax rate (may well be higher than that) and that you put an after-tax amount equal to your previous pre-tax 401-k contribution into an index fund.
That $780,000 is compared to the $1.36 million you’d have doing it the normal way. Your nest egg was reduced by over 40% thanks to the Federal government protecting you from market risk. Isn’t that special?
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081012/REG/310139971
An excerpt:
House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.
Under Ms. Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3% a year, adjusted for inflation.
The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.
“I want to stop the federal subsidy of 401(k)s,” Ms. Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”
End of excert
Farther on in the article it says that companies would probably not do the matching that they do now if no tax break incentive. So - for $600 a year you lose your matching funds and get 3% a year on your savings. Sounds like a real winner to me. I sure hope they can come up with a health plan that is just as great.