Fiscal Cliff: Why Congress Might Have to Mess with the 401(k)

Time ^ | 11/29/12 | Dan Kadlec

[Perdogg]

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.

[justlurking]

Wouldn't a retroactive tax on 20 years of 401(k) savings be an ex post facto law?

Given that contributions were being made under one set of tax laws, I think one could make the case that changing the laws regarding those contributions is ex post facto.

But, I would expect the change to be made for future withdrawals. One could also make the case that is not. I don't agree, but I'm guessing that the Democrats could find a judge that would accept that.

I'm in a strange situation: I'm not yet old enough to make a Roth IRA withdrawal without penalty. But, I think the penalty is 10%. That would likely be less than my marginal income tax rate, either now or in the future. So, if Congress did indeed change the law on Roth withdrawals, it might be better to cash out now.

However, even if I were to reinvest the assets in a non-qualified investments, I would miss out on deferring income taxes on the realized gains between now and when I originally planned to withdraw them.

The truth is: I think the worst Congress could do is turn prior contributions to Roth accounts into the equivalent of non-deductible contributions to traditional IRAs. And while it's not ideal, it's still better than no tax deferral at all.

[morphing libertarian]

I think it would be illegal to change the rules on already invested funds.

That may not stop DC but I think that’s the precedent.

[444Flyer]

We're dealing with Communistic mindsets. And Obama and his merry gang of thieves are just arrogant, evil and stupid enough to try this.

[444Flyer]

"Even if they take over the retirement plans, just who exactly is going to buy all the stocks and bonds?"

LOL In their rapid grab for power and incompetence, they haven't thought that far...

[444Flyer]

"Even if they take over the retirement plans, just who exactly is going to buy all the stocks and bonds?"

LOL In their rabid grab for power and incompetence, they haven't thought that far...

[EVO X]

I'm in a strange situation: I'm not yet old enough to make a Roth IRA withdrawal without penalty

You can withdraw the contributions from a Roth IRA without penalty as long as you've met the 5 year vesting period. Any earnings withdrawn prematurely would be subject to tax and penalty.

[Amish with an attitude]

If they can mess with 401K’s in any other way than make them no longer tax deferred, then there’s nothing to stop them from removing money from checking accounts too.

[RedMDer]

Let's Put This Baby To Bed!! Less than $2.7k to go!! 270 FReepers with $10 or 27 FReepers with a $100 and we are over the top. How about it FReepers. Any takers?

Let's Put This Baby To Bed!! Less than $2.7k to go!! 270 FReepers with $10 or 27 FReepers with a $100 and we are over the top. How about it FReepers. Any takers?

[abb]

If they can mess with 401K’s in any other way than make them no longer tax deferred, then there’s nothing to stop them from removing money from checking accounts too.

Think about this: Other than a piece of paper on file at the county clerk's office, what says that you "own" a piece of property?

[Kolath]

Mess with certain deductions is one thing, but to take a person’s privately-funded retirement is another.

There will be blood if they tried this.

[EVO X]

If you are in a position to do so, you can begin (possibly gradually) to move any existing retirement funds from “traditional IRAs” to Roth IRAs.

The way I read the rules is that a conversion to a Roth IRA would still invoke the 5 year vesting rule for those funds. So if they got trigger happy and wanted to cash out the Roth IRA, the newly converted money would be subject to the 10% penalty if not held in the Roth for 5 years...

[Red in Blue PA]

If the trillions in 401k’s and ira’s comes out of the stock market..look out below..

If it all comes out, there won't BE a stock market!

[Red in Blue PA]

There have to be one or two brains in DC who realize the danger in doing something like this. Once they take everything someone has worked for their entire life, in essence they take their life.....so why should that person continue to “play by the rules” if the govt proves it cannot?

They are asking for CW II should they do this. (The phrase CWII is badied about often, but here it is merited IMO)

[Red in Blue PA]

I’d rather go to Atlantic City and place it all on red than flush a dime of it down the corrupt government toilet.

I would rather cash it out in small bills and burn it than have obama's people get it.

[Red in Blue PA]

Ordinarily you would be correct. But take everything a person has, and what do they have to lose?

[FreeReign]

The Mortgage Interest Loophole (as Rush calls it) doesn’t affect the bottom half of taxpayer, since the standard deduction is so big. The REAL WINNERS from this are, just as you say, upper middle-class (and higher) people with large mortgages (i.e., in BLUE states). Let them sacrifice for once.

Let who sacrifice for once?

Most "upper middle class" people don't get any deductions because they have to pay the AMT.

To say that they are benefiting from mortgage deductions and that they don't sacrifice is absurd.

[Wicket]

I talked to a co-worker yesterday (who is a conservative) who said the uproar would be so loud, it would never happen. I don’t think he’s taking into account the open class warfare that’s going on at this point.

Sent him a link to the article - anything in Time magazine has to be true, of course - and suggested he might want to reconsider his mattress. :-)

[justlurking]

You can withdraw the contributions from a Roth IRA without penalty as long as you've met the 5 year vesting period. Any earnings withdrawn prematurely would be subject to tax and penalty.

Yes, I should have clarified that: I meant the earnings, not the original contributions.

[Road Glide]

“I would think a lot of people would quit en masse and take the freaking penalty just to take their $$$ out of 401Ks”

Then again, if there is “a run on 401k’s and IRA’s”, the feds might just clamp down with a “401k Holiday” — all funds frozen, no withdrawals — just like they closed the banks in the Great Depression.

Not sure how folks would react. But I’d reckon the official line would be, “your money is safe, no one can touch it”.

Not even you.

[Victor]

"...Theresa Ghilarducci...."

Cold, fishlike eyes...like Ivy Starnes in Atlas Shrugged.

The eyes of a woman without a soul...