Legal Law

Congress comes after its 401 (K)

75% of Americans disapprove of the work our representatives are doing. It’s things like this that explain why:

While only about 13% of American employees nationwide enjoy a retirement fund that ensures stable income for life, all 535 members of Congress do … courtesy of Uncle Sam.

Members of Congress participate in the Federal Employees Retirement System, which provides pension benefits that most American workers can only dream of.

Private retirement savers often pay management fees that can exceed 1% per year on lousy investment options. Members of Congress pay a maximum of 0.039% for guaranteed funds to match the market.

A proposal floating around Republican circles in Washington would be an insult to injury: They want to end the tax deductibility of their pension contributions so they can give a $ 1.5 billion tax break to American corporations.


Give and take

Congress is reportedly considering whether to reduce the benefits of contributing to 401 (k) and similar retirement plans.

That’s because he wants to reform corporate taxes, cutting the rate from 35% to 15%. That opens a meteor-sized hole in the federal budget.

Notify the pension police.

According to the latest Joint Tax Committee report, excluding contributions and earnings from defined contribution plans will cost the federal government more than $ 584 billion over the next five years.

The new proposal would treat all 401 (k) and traditional IRA contributions as if they were Roth IRA contributions. You would lose the tax exclusion on those contributions, but your future 401 (k) / IRA earnings and appreciation would be tax-free. Some think this could raise $ 1.5 trillion in additional tax revenue over the next decade, making corporate tax cuts feasible.

Unless they also decide to tax retirement earnings and appreciation.

End of the Roth?

At this time, any income and earnings that your 401 (k) and / or traditional IRA generates are not taxed until you make withdrawals.

But a new proposal would impose a 15% tax on those annual profits, raising another $ 1.5 trillion over the next decade. However, that would be even worse than ordinary taxable investment accounts, where capital gains tax can be deferred simply by not selling shares.

“It’s not really a question of whether retirement plans will be cut, but by how much,” said Bradford Campbell, a former undersecretary of labor for employee benefits during George W. Bush’s presidency. Replacing lost income from tax cuts, he said, is “a game of winners and losers, and the retirement system is about to be one of the losers.”

My sources in Washington tell me that the Trump team is definitely planning to push through a tax reform like President Ronald Reagan’s in 1986, closing the loopholes and cutting rates. It won’t just be a tax cut, as was rumored.

Like the retirement contribution exclusion, the proposals also eliminate state and local income tax deductions. If you live in a place like New York or California, that is something very important.

Who cares?

There is no more controversial issue in American politics than federal tax reform. So who is likely to win and lose if the tax reform follows the proposals of President Donald Trump?

First, his administration cannot count on the unconditional support of the voter base that placed Trump in the White House.

Although low-income voters would likely be neutral as they tend not to have 401 (k) plans or IRAs, households making $ 50,000 or more, the majority of whom voted for the president, would be seriously affected if contributions from retirement were subject to advance tax.

High-income families probably don’t care one way or another, as they tend to hit their retirement contribution limits pretty quickly anyway.

Second, the corporate side of the proposals is tense. Although Trump’s plan cuts the corporate rate from 35% to 15%, many US corporations already pay less than 15% thanks to gaps, especially in energy, utilities and heavy industry.

They will likely oppose the plan as it closes those loopholes. That makes the passage uncertain.

How to prepare

The uncertainty surrounding something we’ve taken for granted, tax-advantaged retirement plans, means you must urgently look for alternatives.

One is to explore the benefits of investing directly in the stock market. Long-term buy and hold strategies can become more attractive than retirement funds, depending on how capital gains are treated in any tax reform plan.

Another alternative is to consider the benefits of life insurance.

Certain types of life policies are much better than traditional retirement vehicles. This is because the IRS currently treats “distributions” from such policies as non-taxable loans against the policy, which are withdrawn when paid as you go.

Life insurance trusts, on the other hand, could become much more attractive vehicles for passing money to your heirs if returns on IRS inheritable accounts plummet.

Whatever happens, I will be attentive to developments … and I will offer you solutions.

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