Author Topic: Why is 401k the "big" tax advantaged account?  (Read 2623 times)

netskyblue

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Why is 401k the "big" tax advantaged account?
« on: February 21, 2015, 01:05:49 PM »
Comparing 401k to IRAs - why is it that the laws are made to allow you to put so much more into a 401k than an IRA?  It seems so foolish to me that the government is encouraging you to save the bulk of your retirement funds in an account where you have little to no say how it's invested.  I mean, you have your pick of the funds which your employer has chosen.

Does the government get something out of doing it that way?  Are they trying to "protect" the little guy who doesn't know how to manage his accounts?  Why not allow $23,500 total into any tax-advantaged account?

I'm tempted - in part -  to leave my employer JUST so I can put my money into a Vanguard account where *I* can control the funds I choose.  (Although there are plenty of reasons why I don't like my job in general.)  I haaaate all that money sitting there in cruddy funds.  Last year, my rate of return was 5.7%, and everything's in high-fee funds.  Employers don't always make the best choices for one's money!

abhe8

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Re: Why is 401k the "big" tax advantaged account?
« Reply #1 on: February 21, 2015, 01:09:16 PM »
Well, I assume it s because the gov gets more tax revenue from 401k funds.

Eta: and those high fee funds have good lobbyists

ender

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Re: Why is 401k the "big" tax advantaged account?
« Reply #2 on: February 21, 2015, 02:07:31 PM »
See if you can do inservice rollovers.

Talk with your company's rep and see if they can get the funds changed. Plenty of success stories here with that approach.

sol

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Re: Why is 401k the "big" tax advantaged account?
« Reply #3 on: February 21, 2015, 02:25:00 PM »
Its the same reason the government doesn't let you draw a reduced SS payment at age 40.  They WANT you to work a long career, paying taxes, building missiles, consuming products, not asking questions. 

Our economy is built on the hedonic treadmil.  Anyone who gets off is a threat to the system.

netskyblue

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Re: Why is 401k the "big" tax advantaged account?
« Reply #4 on: February 21, 2015, 02:34:27 PM »
Its the same reason the government doesn't let you draw a reduced SS payment at age 40.  They WANT you to work a long career, paying taxes, building missiles, consuming products, not asking questions. 

Our economy is built on the hedonic treadmil.  Anyone who gets off is a threat to the system.

But you have to be working to put income into an IRA, too (it has to be earned income).  What's the difference?  I can see the argument against putting that much in a ROTH, that would certainly affect future tax revenues, but why do they want the employers to control the fund choices?  I work for a small business, it's literally one guy (the owner) picking the included funds based on his opinion (and presumably the advice of the 401k company's representative). 

I'm not sure how tax revenue plays into it between traditional IRA/401k... You're taxed at the same rate on disbursements whether you are withdrawing from a trad IRA or 401k, no? 

Indexer

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Re: Why is 401k the "big" tax advantaged account?
« Reply #5 on: February 21, 2015, 02:48:06 PM »
It doesn't make sense.

You are trying to apply logic and reason to US tax laws which are written by politicians.... over decades.

The only logic you can apply is that law 1 was written at one time, and law 2 was written at another, and no one has bothered to consolidate them.

The rules for IRAs were written at one time and limits were set at X.  Limits for 401ks were written at a different time at the limits were Y. 

Another good example:  Why can't someone making 200k/year contribute to a Roth IRA, but they can contribute to a traditional IRA and then convert it to a Roth right after?  (I can actually attempt to answer this one.  The government wanted tax revenue during the recession, opening the floodgates on Roth conversions by removing the income limitations for conversions meant more tax revenue in the present as people converted traditional IRAs[future taxes] into Roths[current taxes].  The unintended result was the ability for wealthy people to do backdoor roth conversions.)
« Last Edit: February 21, 2015, 02:49:41 PM by Indexer »

johnny847

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Re: Why is 401k the "big" tax advantaged account?
« Reply #6 on: February 21, 2015, 03:01:02 PM »
I agree with your fundamental point OP. If the government allowed us to contribute as much to an IRA as we can to 401k's then I would imagine it would force 401k administrators to actually provide good funds in 401ks.

But I think Indexer has the right idea. Laws aren't necessarily logical. There is some reason that they were passed at the time, but it may not make sense now when you put it together with other laws that have passed.

Also, I recall from the documentary "The Retirement Gamble" that the 401k used to be used as a high income corporate tax dodge, and pensions were the norm. Then some companies decided that they want to pass the burden of retirement from the employer, who had to maintain the pension plan, to the employee, who had to manage the 401k.