If the Federal government were to tax my 401(k) plan, I'd quit my job, cash it out in stages, and enjoy several years of leisure. Even with the 10% penalty for an early withdrawal, I'd still be paying less in Federal taxes in a lower tax bracket than I am right now.
Anyone see any holes in this plan?
You can play the angles on a regular IRA vs. a Roth; as a broad proposition, it's close enough to a wash that I don't think this change would much affect IRA participation. I suspect the same would be true for 401(k)'s; it's the ability to let your money grow tax deferred for long periods that provides the real benefit, not the initial deductibility.
If contributions to all retirement accounts become taxable income, then what’s the incentive for anyone to save for retirement in a retirement account? “
Are you telling us that something saving for retirement is not worth doing without a Gummint subsidy??
Hmmmm.....
Well, I can say that if this passes, the next day I would contact HR and stop my funding of IRA at work.
To answer your other questions, you are ASSUMING that they will not raise the penalty to something like 50% or more, or tell you that your money will be sent to you as social security when you retire at their preferred time and place.
“Anyone see any holes in this plan?”
Higher tax brackets resulting from 401K contributions that would now be included in total taxable income, essentially a back door income tax increase.