Author Topic: Republicans Consider Sharp Cut in 401(k) Contribution Limits  (Read 80771 times)

kenmoremmm

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Republicans Consider Sharp Cut in 401(k) Contribution Limits
« on: October 20, 2017, 10:08:37 PM »
https://www.nytimes.com/2017/10/20/us/politics/republicans-tax-401-k.html
Quote
WASHINGTON — House Republicans are considering a plan to sharply reduce the amount of income American workers can save in tax-deferred retirement accounts as part of a broad effort to rewrite the tax code, according to lobbyists, tax consultants and congressional Democrats.

It is unclear if Republicans will ultimately include a cap on contributions in the tax bill that they are expected to release in the coming weeks. Such a move would almost certainly prompt a vocal backlash from middle-class workers who save heavily in such retirement accounts and from the asset management industry.

The proposals under discussion would potentially cap the annual amount workers can set aside to as low as $2,400 for 401(k) accounts, several lobbyists and consultants said on Friday. Workers may currently put up to $18,000 a year in 401(k) accounts without paying taxes upfront on that money; that figure rises to $24,000 for workers over 50. When workers retire and begin to draw income from those accounts, they pay taxes on the benefits.

Rumors have circulated for months that negotiators were debating including a cap as a way to help offset the revenue loss from a reduction in business tax rates that Republicans have put at the center of their plan. Reducing contribution limits would be, in effect, an accounting maneuver that would create space for tax cuts by collecting tax revenue now instead of in the future.

Such a move would be likely to push Americans to shift their savings to so-called Roth accounts, where contributions are taxed immediately, and not when they are drawn out as benefits. That would increase federal tax receipts for the short run.

The congressional Joint Committee on Taxation estimates that tax exclusions for individual retirement contributions will cost the federal government $115 billion for the 2018 fiscal year. That is just a fraction of the $1.5 trillion tax cut that Republicans are aiming to enact.

In addition to being politically problematic, including a cap could also complicate the tax bill’s prospects in the Senate. Under the rules of budget reconciliation — the method Republicans are employing to avoid a Democratic filibuster of the bill — legislation cannot increase budget deficits after a decade. Shifting revenue by lowering 401(k) limits “raises money early, but loses money late, and that’s exactly the opposite of what you want in a reconciliation bill,” said Rohit Kumar, a former Senate aide who leads the tax policy services practice at PricewaterhouseCoopers, an accounting firm, in Washington.

Republicans drafting the tax bill have kept its details closely held, and they would not comment on Friday about whether 401(k) changes were under discussion. Republicans on the House Ways and Means Committee “are developing pro-growth tax reform policies that will encourage and support retirement savings for all Americans,” a committee spokeswoman said.

The tax framework that President Trump and congressional Republican leaders released last month promised to retain “tax benefits that encourage work, higher education and retirement security.” It left the door open to changes in the current system, saying that “the committees are encouraged to simplify these benefits to improve their efficiency and effectiveness.”

Democrats have seen firsthand the perils of proposing changes to savings accounts. In 2015, an outcry forced President Barack Obama to quickly back off his proposal to change the tax benefit of college savings plans known as 529 accounts.

On the Senate floor on Thursday, Senator Gary Peters, Democrat of Michigan, warned that the Republican majority was “keeping open the possibility of raising taxes on Americans who are trying to save for their retirement.”

In a statement on Friday, Representative Richard E. Neal of Massachusetts, the top Democrat on the Ways and Means Committee, said that the Republican proposals “would hurt those saving responsibly for retirement at a time when an alarming number of families have fallen behind in their retirement savings.”

A study by researchers at Harvard and Yale, released in 2015, found no evidence that the timing of when savings accounts are taxed affects how much Americans save.

aspiringnomad

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #1 on: October 20, 2017, 10:36:22 PM »
Saw this and laughed. No comment except to say good luck with that, fellas. In terms of pure politics, this proposal might actually be more harmful than having a deranged megalomaniac as a standard bearer. Combine the two and you've got a recipe for a wave election in 2018.

Taran Wanderer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #2 on: October 20, 2017, 10:41:50 PM »
I had to chuckle at the political insanity of this. Also because I'm happy our retirement is pretty much funded already, and anything we save from here is gravy. And because I've been going the Roth route anyway.

But still, these are republicans who supposedly treasure personal responsibility? And they want to gut a program that is an amazing incentive for personal responsibility?  Unbelievable.

EngineeringFI

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #3 on: October 21, 2017, 08:58:54 AM »

But still, these are republicans who supposedly treasure personal responsibility? And they want to gut a program that is an amazing incentive for personal responsibility?  Unbelievable.

I had this exact same thought, it feels like a remarkably non-republican thing to propose. I can't wait to see an interview with a politician who tries to justify this through the lens of "conservatism", that's going to be some serious double-speak.

Mr. Boh

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #4 on: October 21, 2017, 09:30:51 AM »
As with everything else the current republican congress/administration proposes, I'll believe it when I see it. So far they have achieved very little.

kayvent

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #5 on: October 21, 2017, 10:19:54 AM »

But still, these are republicans who supposedly treasure personal responsibility? And they want to gut a program that is an amazing incentive for personal responsibility?  Unbelievable.

I had this exact same thought, it feels like a remarkably non-republican thing to propose. I can't wait to see an interview with a politician who tries to justify this through the lens of "conservatism", that's going to be some serious double-speak.

I am neither Republican nor share much of their positions. I am Canadian, but I can give a few lines of defence.

- The 401k system benefits those with money more than those without. In this day and age where people at the bottom are struggling, can we really afford these boutique programs that disproportionately benefit the rich?

- The middle class need to pay their fair share. If you compare North American taxes with European taxes, the uber rich and corporations in both pay a lot in taxes. The difference is that the middle class in North America pay peanuts.

- It complicates things and creates some perverse incentives. Canada’s analog are RRSPs. Their implementation and implications drive a wrench in a lot of programs. I have a student loan and a child. Because CCB is derived from AFNI and RRSP contributions reduce AFNI, it is financially better to ignore the loan in favour of RRSP contributions. (1) this is ludicrous that saving money gives me money to raise my child (2) this is a pain to know and only those who do the calculation by hand would discover this (or had an accountant)

I’d personally feel better about the Canadian tax system if we scraped RRSPs and TFSAs (of course with a grandfather exception). Simplifies the tax code, broadens the base, stops some tax avoidance, and the extra money collected can go to help the poor and struggling.
« Last Edit: October 21, 2017, 10:22:59 AM by kayvent »

smallstache

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #6 on: October 21, 2017, 10:46:23 AM »
No. Congress should take it a step further and eliminate all tax breaks--retirement savings, college savings/loan interest deductions, mortgage interest, carried interest, oil and gas tax breaks, child tax credits, personal exemptions, standard deductions, capital gains rates, timber and mining tax breaks.

All in return for lower (and fewer) tax brackets.

Also, corporate rates that equal personal rates.

That is true transparency in the tax code.

sokoloff

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #7 on: October 21, 2017, 10:50:41 AM »
I’d personally feel better about the Canadian tax system if we scraped RRSPs and TFSAs (of course with a grandfather exception). Simplifies the tax code, broadens the base, stops some tax avoidance, and the extra money collected can go to help the poor and struggling.
Assuming it's like 401K and traditional IRA in the US, this is much more a deferral of taxes than a reduction. The government can get its money now or (virtually) invest alongside the individual for a few decades and then get its money later. Most of these accounts are invested at return CAGRs over the T-bill rate, so the government is getting more money if it invests alongside than if it takes it now. (Yes, they get to double-dip a bit when they take the money now and tax on gains later, but the second dip is largely LTCG rather than ordinary income for savvy investors.)

But high-order, this is a money-now vs more-money-later discussion, not money-now vs nothing-later.

maizefolk

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #8 on: October 21, 2017, 10:59:07 AM »
All in return for lower (and fewer) tax brackets.

So I certainly see the appeal (and benefits) of removing lots of complicated deductions that individually benefit subsets of people to produce lower tax rates for everyone.

Why are fewer tax brackets better than more tax brackets? Assuming you're not arguing for a flat tax (no different tax brackets), that means you have at least two tax brackets. All things being equal, wouldn't it make sense to slowly phase in higher tax rates through several intermediate brackets instead of a sudden sharp increase?

protostache

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #9 on: October 21, 2017, 11:32:52 AM »
All in return for lower (and fewer) tax brackets.

So I certainly see the appeal (and benefits) of removing lots of complicated deductions that individually benefit subsets of people to produce lower tax rates for everyone.

Why are fewer tax brackets better than more tax brackets? Assuming you're not arguing for a flat tax (no different tax brackets), that means you have at least two tax brackets. All things being equal, wouldn't it make sense to slowly phase in higher tax rates through several intermediate brackets instead of a sudden sharp increase?

"Look! We simplified the tax code! (Just don't look over here where we "simplified" it in a way that just happens to benefit our donors more than you.)"

bacchi

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #10 on: October 21, 2017, 11:43:17 AM »
But high-order, this is a money-now vs more-money-later discussion, not money-now vs nothing-later.

Yes, "money-now" might actually work if there was a serious plan about reducing the debt but -- no surprise -- the majority of Republicans are all about reducing taxes and increasing spending. It's as if they want to repeat the Kansas experiment for the entire nation.

Ocinfo

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #11 on: October 21, 2017, 11:56:04 AM »
But high-order, this is a money-now vs more-money-later discussion, not money-now vs nothing-later.

Yes, "money-now" might actually work if there was a serious plan about reducing the debt but -- no surprise -- the majority of Republicans are all about reducing taxes and increasing spending. It's as if they want to repeat the Kansas experiment for the entire nation.

The money now part is all that matters. Due to the process being used, they are only allowed to consider the effects out to 10 years. So, by making more money taxable now, it lets them fudge the numbers even if it means less total tax revenue over greater than 10 years.


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smallstache

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #12 on: October 21, 2017, 12:03:58 PM »
All in return for lower (and fewer) tax brackets.

So I certainly see the appeal (and benefits) of removing lots of complicated deductions that individually benefit subsets of people to produce lower tax rates for everyone.

Why are fewer tax brackets better than more tax brackets? Assuming you're not arguing for a flat tax (no different tax brackets), that means you have at least two tax brackets. All things being equal, wouldn't it make sense to slowly phase in higher tax rates through several intermediate brackets instead of a sudden sharp increase?

I personally wouldn't mind a flat tax (or all the tax benefits that I enjoy now...I made $330,00 last year and paid $6770 in tax...2% in federal rate).  I think there is some merit in a graduated income tax policy, but the current seven-rate structure + ACA surcharge tax is way too many.

CheapScholar

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #13 on: October 21, 2017, 12:31:00 PM »
As a Republican this idea disappoints me.  The idea of shifting towards Roth is nice in theory but eventually the Democrats will raise the tax rates AND at 37 I'm skeptical I'll ever withdraw money from Roth and actually not pay taxes.  I could see a Bernie Sanders type saying "we're just going to tax the rich people with a million dollars in their Roth accounts so the middle class can get a break."

My wife and I max out 403b plans right now.  Personally, we would save a LOT less if this happened.  We have a lot invested already.  I'd probably pay off the mortgage and go on two cruises per year if they capped my pretax advantage at $2,400.

Like someone else said, though, I doubt this happens. 

Taran Wanderer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #14 on: October 21, 2017, 02:33:33 PM »
I'd probably pay off the mortgage and go on two cruises per year if they capped my pretax advantage at $2,400.

Funny, I was thinking along the same lines.  There are a lot of trips I would like to take, and maxing our tax deferred accounts takes a pretty big chunk out of the travel budget.

frugledoc

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #15 on: October 21, 2017, 04:03:20 PM »
Seems like this would piss off your typical republican voter, but I'm in the UK.

For comparison, our income taxes in the UK are much higher but we have better tax shelters:
- 20k per year into our version of Roth
- 40k per year into our version of 401k (with 1 million lifetime allowance), tapered for those earning more than 150k

I do wish people would stop referring to people who are paying taxes and not being a burden on the state as rich.

Rich is when you have so much money you can spend as much as you want forever, with no chance of running out of money, even if you are buying a new lambo every few months.


ixtap

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #16 on: October 21, 2017, 04:06:37 PM »
Seems like this would piss off your typical republican voter, but I'm in the UK.

For comparison, our income taxes in the UK are much higher but we have better tax shelters:
- 20k per year into our version of Roth
- 40k per year into our version of 401k (with 1 million lifetime allowance), tapered for those earning more than 150k

I do wish people would stop referring to people who are paying taxes and not being a burden on the state as rich.

Rich is when you have so much money you can spend as much as you want forever, with no chance of running out of money, even if you are buying a new lambo every few months.

No, that is filthy rich.

maizefolk

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #17 on: October 21, 2017, 04:50:44 PM »
I do wish people would stop referring to people who are paying taxes and not being a burden on the state as rich.

Rich is when you have so much money you can spend as much as you want forever, with no chance of running out of money, even if you are buying a new lambo every few months.

In my experience, rich is making at least twice as much money as the people who are discussing what the threshold for rich is. ;-)

Telecaster

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #18 on: October 21, 2017, 04:54:29 PM »

But still, these are republicans who supposedly treasure personal responsibility? And they want to gut a program that is an amazing incentive for personal responsibility?  Unbelievable.

I had this exact same thought, it feels like a remarkably non-republican thing to propose. I can't wait to see an interview with a politician who tries to justify this through the lens of "conservatism", that's going to be some serious double-speak.

It is exchanging increased tax receipts now, for decreases tax receipts in the future.  Kicking the can down the road in other words. 

There is nothing more Republican than that. 

teen persuasion

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #19 on: October 21, 2017, 06:25:06 PM »
Yikes, I just ran the math on how this would change our taxes.  It would cost us an additional $8200.  That's ridiculous on $50k AGI.

kayvent

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #20 on: October 21, 2017, 06:40:03 PM »
I do wish people would stop referring to people who are paying taxes and not being a burden on the state as rich.

Please forgive my ignorance of the British tax system and indulge me for a second because I honestly forget more about your system than I recall. Does the general middle-class bourgeois in the UK pay a significant amount of taxes?

In Canada and the USA, few people pay net taxes. For example, someone may pay income tax and sales tax or property tax but if you factor in the tax benefits they receive (ex. the Canadian Child Benefit), their effective net tax rate is pretty low. I paid around 240$ in net Federal & Provincial taxes last year not including VAT taxes (some napkin math leads me to guess ~1500).

On these forums, we make spectacular incomes. I’m in the top 97th in Canada for my age. Some Americans on these forums make me look like a pauper. If you meander to the 2016 tax rate thread you’d notice that a lot of us are paying single digit or negative effective tax rates. We’re not atypical in this area though. Depending on whose numbers you refer to, about ~10% of the population pay almost all of the taxes (excluding taxes corporations pay).

I live in a great country. Justin Trudeau thinks I shouldn’t have to pay for it. I think us greedy, rich middle class people should. By and large, we aren’t doing much useful with the money they aren’t taxing us with except consuming and getting into debt.
« Last Edit: October 21, 2017, 06:43:23 PM by kayvent »

threefive

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #21 on: October 21, 2017, 07:40:41 PM »
- The middle class need to pay their fair share. If you compare North American taxes with European taxes, the uber rich and corporations in both pay a lot in taxes. The difference is that the middle class in North America pay peanuts.

I'd love to hear a Bernie-bro admit to this, because it's true. I'm a six-figure earner in the US, beating the snot out of the average US household income and straight-up curb stomping the world average. My effective federal tax rate will be <1% this year, mostly because of 401k deductions and for the asinine reason that my employer provides a health insurance plan and I don't have to purchase one myself, so now it's magically completely tax deductible while keeping the standard deduction. And kids. My ability to procreate definitely warrants that $2k tax haircut because ... something, something, something. ~50% of the US population doesn't pay federal income tax at all. We could jack up the rates to 100% for incomes over $1 million and it wouldn't come close to raising enough revenue to pay for some Bernie-style social programs. The reality is, and lefty Demos need to admit and come clean, that if we want universal health insurance, free public universities, free puppy daycare and lollipops, then taxes need to go up on the middle class, and a lot. A little VAT action would be needed, too, just to make sure we get some more poor-people skin in the game. The American Left has been trying to sell a rainbow by promising Euro-style social programs for the cost of a few drops of rich-people blood. It sure is pretty, but unfortunately it's all just water vapor. At least now the Repubs are finally being explicit and clear about their desire to lower taxes for business and rich people by making the (mostly upper-) middle class pay their fair share, and providing a big, beautiful wall in return.

theolympians

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #22 on: October 21, 2017, 08:38:33 PM »
I saw this click bait like everyone else here.  That is all it is.

Travis

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #23 on: October 21, 2017, 08:50:37 PM »
I do wish people would stop referring to people who are paying taxes and not being a burden on the state as rich.

Rich is when you have so much money you can spend as much as you want forever, with no chance of running out of money, even if you are buying a new lambo every few months.

In my experience, rich is making at least twice as much money as the people who are discussing what the threshold for rich is. ;-)

Some of us had a fun discussion on this question a while back.

https://forum.mrmoneymustache.com/welcome-to-the-forum/defining-'rich'/

https://forum.mrmoneymustache.com/welcome-to-the-forum/how-to-know-if-you're-rich/

obstinate

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #24 on: October 21, 2017, 10:09:43 PM »
See as a liberal this actually strikes me as the second defensible idea the Republicans have put forth. The first being cutting the corporate tax rate.

Now, if they're just doing this to give a tax cut to billionaires who don't really benefit from 401ks, that's another story. And, based on what they've put forward so far, that's exactly what's happening. But in isolation, I support cutting 401k contribution limits.

fattest_foot

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #25 on: October 21, 2017, 10:39:44 PM »
- The middle class need to pay their fair share. If you compare North American taxes with European taxes, the uber rich and corporations in both pay a lot in taxes. The difference is that the middle class in North America pay peanuts.

I'd love to hear a Bernie-bro admit to this, because it's true. I'm a six-figure earner in the US, beating the snot out of the average US household income and straight-up curb stomping the world average. My effective federal tax rate will be <1% this year, mostly because of 401k deductions and for the asinine reason that my employer provides a health insurance plan and I don't have to purchase one myself, so now it's magically completely tax deductible while keeping the standard deduction. And kids. My ability to procreate definitely warrants that $2k tax haircut because ... something, something, something. ~50% of the US population doesn't pay federal income tax at all. We could jack up the rates to 100% for incomes over $1 million and it wouldn't come close to raising enough revenue to pay for some Bernie-style social programs. The reality is, and lefty Demos need to admit and come clean, that if we want universal health insurance, free public universities, free puppy daycare and lollipops, then taxes need to go up on the middle class, and a lot. A little VAT action would be needed, too, just to make sure we get some more poor-people skin in the game. The American Left has been trying to sell a rainbow by promising Euro-style social programs for the cost of a few drops of rich-people blood. It sure is pretty, but unfortunately it's all just water vapor. At least now the Repubs are finally being explicit and clear about their desire to lower taxes for business and rich people by making the (mostly upper-) middle class pay their fair share, and providing a big, beautiful wall in return.

I'd say the difference between the US and other counties, however, is that their middle classes are able to draw from more programs than the middle class in the US.

Basically, if you're in the top two quintiles, you're the only ones actually paying taxes, but you're also not eligible for any of the socialistic programs that middle class tax payers in other countries get. We're taxed lower, sure, but we're also not getting all the extra benefits of what those increased taxes would mean.

If the US government wanted to start up UHC, more than likely a lot of us would end up rolling whatever we pay to be covered under our employer plans to taxes instead. It'd probably end up being close to a break even amount. Our "tax rate" would increase, but all things considered our situation would remain the same.

spjulep

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #26 on: October 21, 2017, 10:44:45 PM »
As a Republican this idea disappoints me.  The idea of shifting towards Roth is nice in theory but eventually the Democrats will raise the tax rates AND at 37 I'm skeptical I'll ever withdraw money from Roth and actually not pay taxes.  I could see a Bernie Sanders type saying "we're just going to tax the rich people with a million dollars in their Roth accounts so the middle class can get a break."
As relatively few Americans contribute to or max out their 401k plans, this group is an easy target without a lot of political clout. Republicans can scrape together a few funds to offset incredible gains they propose to give to corporations and the wealthy. Of course, those who are truly wealthy are sheltering their assets through other means and won't be too bothered losing the 401k deduction. A Bernie Sanders type would not tax the middle (or perhaps, upper middle) class to benefit corporations and the 1%; it's astonishing to me that the Republicans can sell this to their constituents. I recommend the book What's the Matter with Kansas, which shows how poor constituents in red states have been tricked into voting against their own economic interests through propaganda, exemplified by the fear of what a Bernie Sanders type would do.

By the way, how many breaks for the actual middle class are proposed in the current bill?

CheapScholar

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #27 on: October 22, 2017, 06:23:58 AM »
I hear you, spjulep.  I've read the book you suggested years ago and I agree the GOP is far from infallible, especially when it comes to the tax code.  I don't feel I've been tricked by the party, I know they will take short term economic gains to bolster economic indicators.  I vote GOP more for social issues to be honest. 

But, I'm still very skeptical of Roth.  My wife and I have Roth accts but mainly because there were some years where we did so well we had to put money somewhere and it was more like 'what the hell, open Roths.'

For me, I like the tax benefit up front, which is what many of the articles out there are concluding.  I probably wouldn't be a player in Mnuchin's switch to Roth idea, mainly because I've built up a solid nest egg already and I don't plan on retiring for 13 more years.  So yeah, my wife and I would probably be spending that $18,500 + $18,500 per year if we couldn't get the upfront tax advantage.  Perhaps that's what the architects of the plan want?  Ironically, I'd probably travel to Europe at least once a year and blow a lot of that money abroad. 

maizefolk

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #28 on: October 22, 2017, 07:21:50 AM »
- The middle class need to pay their fair share. If you compare North American taxes with European taxes, the uber rich and corporations in both pay a lot in taxes. The difference is that the middle class in North America pay peanuts.

I'd love to hear a Bernie-bro admit to this, because it's true. I'm a six-figure earner in the US, beating the snot out of the average US household income and straight-up curb stomping the world average. My effective federal tax rate will be <1% this year, mostly because of 401k deductions and for the asinine reason that my employer provides a health insurance plan and I don't have to purchase one myself, so now it's magically completely tax deductible while keeping the standard deduction. And kids. My ability to procreate definitely warrants that $2k tax haircut because ... something, something, something. ~50% of the US population doesn't pay federal income tax at all. We could jack up the rates to 100% for incomes over $1 million and it wouldn't come close to raising enough revenue to pay for some Bernie-style social programs. The reality is, and lefty Demos need to admit and come clean, that if we want universal health insurance, free public universities, free puppy daycare and lollipops, then taxes need to go up on the middle class, and a lot. A little VAT action would be needed, too, just to make sure we get some more poor-people skin in the game. The American Left has been trying to sell a rainbow by promising Euro-style social programs for the cost of a few drops of rich-people blood. It sure is pretty, but unfortunately it's all just water vapor. At least now the Repubs are finally being explicit and clear about their desire to lower taxes for business and rich people by making the (mostly upper-) middle class pay their fair share, and providing a big, beautiful wall in return.

I'd say the difference between the US and other counties, however, is that their middle classes are able to draw from more programs than the middle class in the US.

Basically, if you're in the top two quintiles, you're the only ones actually paying taxes, but you're also not eligible for any of the socialistic programs that middle class tax payers in other countries get. We're taxed lower, sure, but we're also not getting all the extra benefits of what those increased taxes would mean.

If the US government wanted to start up UHC, more than likely a lot of us would end up rolling whatever we pay to be covered under our employer plans to taxes instead. It'd probably end up being close to a break even amount. Our "tax rate" would increase, but all things considered our situation would remain the same.

I don't think this is quite right. Yes a large fraction of american households don't pay net federal income tax, but it isn't as simple as sorting american households by income and saying every above this line pays taxes and everyone below this line doesn't. Lots of people make a lot of money and pay little tax, some people make moderate amounts of money and end up owning non-trivial amounts of federal income tax.

Take the example of threefive and me. I don't know what threefive actually makes, but the scenario described would be possible for someone with my income, so let's assume the two of us make about the same amount of money and are in the top quintile of household incomes in the USA. I paid an effective federal tax rate of ~20% last year, threefive paid ~1%.

(Not to pick on you threefive. Thanks for posting a real-world example of the opposite end of the distribution of possible tax outcomes for relatively high income earners, and congrats!)
« Last Edit: October 22, 2017, 07:27:01 AM by maizeman »

Indexer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #29 on: October 22, 2017, 08:01:10 AM »
Switching everyone from Traditional 401ks to Roth 401ks doesn't improve the fiscal situation. It just 'moves' it. Millions of people will lose tax deductions today in exchange for never paying taxes in the future. This makes the Republican's tax cut deficit neutral in the short term, but it does so by moving the giant deficit into the future.

I hate the plan for the simple reason that it just further proves the Republicans aren't the party of fiscal responsibility.

I am for reforming the tax code. I'm even okay with losing deductions if it cleans everything up, simplifies the tax code, and balances the budget. If you don't balance the budget I don't see the point of the other parts.

Side note: the economy is good right now. If you are going to balance the budget 'this' is the time to do it. Then we can start running deficits again the next time we hit a recession.

sherr

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #30 on: October 22, 2017, 09:04:35 AM »
- The middle class need to pay their fair share. If you compare North American taxes with European taxes, the uber rich and corporations in both pay a lot in taxes. The difference is that the middle class in North America pay peanuts.

I'd love to hear a Bernie-bro admit to this, because it's true. I'm a six-figure earner in the US, beating the snot out of the average US household income and straight-up curb stomping the world average. My effective federal tax rate will be <1% this year, mostly because of 401k deductions and for the asinine reason that my employer provides a health insurance plan and I don't have to purchase one myself, so now it's magically completely tax deductible while keeping the standard deduction. And kids. My ability to procreate definitely warrants that $2k tax haircut because ... something, something, something. ~50% of the US population doesn't pay federal income tax at all. We could jack up the rates to 100% for incomes over $1 million and it wouldn't come close to raising enough revenue to pay for some Bernie-style social programs. The reality is, and lefty Demos need to admit and come clean, that if we want universal health insurance, free public universities, free puppy daycare and lollipops, then taxes need to go up on the middle class, and a lot. A little VAT action would be needed, too, just to make sure we get some more poor-people skin in the game. The American Left has been trying to sell a rainbow by promising Euro-style social programs for the cost of a few drops of rich-people blood. It sure is pretty, but unfortunately it's all just water vapor. At least now the Repubs are finally being explicit and clear about their desire to lower taxes for business and rich people by making the (mostly upper-) middle class pay their fair share, and providing a big, beautiful wall in return.

I don't know if I qualify as a Bernie-bro but I'll bite. It is bordering on intellectual dishonesty to look only at income tax and claim that poor and middle class people pay nothing. For the federal government alone we also have the FICA taxes, excise taxes, and corporate taxes (which Republicans are the first to admit are "actually paid for by the workers in the form of lower wages"). Also the estate tax, but that's only paid by the ultra-rich. At the state and local level you also have sales tax, probably state income tax, and property taxes (paid either directly if you're a property owner or indirectly in the form of higher rent if you're a renter). The poor and middle class do pay taxes, all the time, built into every purchase they make (in several ways). The question of "is it enough" is a valid one, but you can't even begin to approach it by looking only at income tax.

It is also true that we live in an era of drastically increasing wealth inequality. The ultra-rich are really truly ultra-rich, compared with any other time in history. It is not unreasonable to ask the ultra-rich to pay a large portion of the income tax to enable the society that allowed them their meteoric rise to ultra-weath to continue to exist.

I am also a six-figure earner. I'll be the first to admit that you and I should probably pay more in taxes. But "middle class" is a term that is so vague it is meaningless. Everyone thinks of themselves as middle-class, and there is no authority to tell them they are wrong. Middle-class people like us should pay more, sure. Middle-class people like my dad, who has worked hard his whole life and has nothing to show for it except having successfully raised his kids, absolutely not.

People who have money will always be able to save more than people who do not, regardless of the laws. Laws like the 401k deduction exist to incentivize behavior that is good for society. We really do want people to save for their own retirement so that they're not a burden on society in the future. Pensions are bad because the workers are completely dependent on the company to make good decisions and not go bankrupt (also because they restrict freedom and mobility and lock you into working for the same company for ~20 years). The industry changes or the company made a few bad decisions and goes bankrupt? Whoops, your lifetime of work and "paying into" the pension evaporates overnight (happened to my grandfather). 401k / IRA gives people control over their own destiny with their own money, but they also require a little more personal responsibility. That's a very conservative change from pensions in-and-of itself, and one I'm personally very happy to see. But we already know from direct experience given society's current saving's rate that it's not enough of an incentive to really solve the societal retirement problem.

And now the "conservatives" want to take away that incentive / benefit from the worker, replace it with nothing, and use the extra tax revenue from the "middle class" to pay for huge tax cuts to the ultra-rich? That's not "conservative", that's plain and simple class warfare. Republicans have to give a good ROI to their ultra-rich campaign donors or they'll stop donating. And no amount of deflecting and hypothesizing about how "Democrats may raise taxes in the future" or "Bernie may steal out of my ROTH" or "but what about potential future social programs and lollipops" can distract from the fact that the Republicans are right now trying to enact legislation that is bad for the worker, bad for society, and only benefits the ultra-rich who don't need any further help.
« Last Edit: October 22, 2017, 09:08:31 AM by sherr »

hgjjgkj

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #31 on: October 22, 2017, 09:48:41 AM »
- The middle class need to pay their fair share. If you compare North American taxes with European taxes, the uber rich and corporations in both pay a lot in taxes. The difference is that the middle class in North America pay peanuts.

I'd love to hear a Bernie-bro admit to this, because it's true. I'm a six-figure earner in the US, beating the snot out of the average US household income and straight-up curb stomping the world average. My effective federal tax rate will be <1% this year, mostly because of 401k deductions and for the asinine reason that my employer provides a health insurance plan and I don't have to purchase one myself, so now it's magically completely tax deductible while keeping the standard deduction. And kids. My ability to procreate definitely warrants that $2k tax haircut because ... something, something, something. ~50% of the US population doesn't pay federal income tax at all. We could jack up the rates to 100% for incomes over $1 million and it wouldn't come close to raising enough revenue to pay for some Bernie-style social programs. The reality is, and lefty Demos need to admit and come clean, that if we want universal health insurance, free public universities, free puppy daycare and lollipops, then taxes need to go up on the middle class, and a lot. A little VAT action would be needed, too, just to make sure we get some more poor-people skin in the game. The American Left has been trying to sell a rainbow by promising Euro-style social programs for the cost of a few drops of rich-people blood. It sure is pretty, but unfortunately it's all just water vapor. At least now the Repubs are finally being explicit and clear about their desire to lower taxes for business and rich people by making the (mostly upper-) middle class pay their fair share, and providing a big, beautiful wall in return.

Takes an amazing person to come into a thread on steep cuts to 401ks and come out with the take, "actually i think we should take even more from the middle class and below." Jesus Fucking Christ.

Yes you are correct that on a dollars basis rich people contribute a greater share of income than the bottom half of society. To get specific the top 50% of earners (Those above $36k) are contributing 97% of income tax dollars to the government (Top 1% above $428k drives 37%).  The 1% cohort is 11 times richer than the bottom cohort based on average salary of the brackets (so really the number is going to be much higher here), and pays 13 times more tax dollars in total. That seems pretty reasonable to me.

When you add the fact that the poverty line in the USA is $12K for singles and 22k for families, you see that the 69M Americans paying less than 15% taxes (Income less than 42K) you can see that while some minimal tax increase may be possible. Materially raising taxes on this cohort of Americans is not realistic. They are already pay check to paycheck, and on an income basis are not able to have a high quality of life. In addition, median income and real wage increase has been on the decline in the USA for nearly 20 years.

If we start with the assumption that we should have a system designed to maximize quality of life. A dollar of tax on these low income classes causes much more material harm to their ability to have a decent quality of life than does raising taxes on 400k households.  I think if you really want to enable the middle class to pay more into the income tax pool, it would be wiser to craft policies to enable these people to actually make more money.  Top 1% reaped about 2/3rds of the gains in the economy from 02-07, post recession its closer to 80%. You reap the gains you pay the taxes.

What you have in this country is a massive decoupling from labor productivity and wage increases in the middle class. The lower class has been completely left behind. As a result of this there is incredible wealth being captured by the ultra rich in this country. If we want to continue this trend it makes a lot of sense to start taxing the wealthy much more. We hopefully do not have to go back to the 50% tax rate in the top bracket that Reagan had, but there is opportunity to tax more, and a need too given the dynamic of the American Economy.

@maizeman I do not think there is much debate about who is considered wealthy, the tax rates and associated brackets are right there for anyone to read

BTW if you are married with a MAGI above 110k you don't qualify for the $1K child income tax credit. So not sure how you are doing it if your income alone is in the low 6s. Not sure how you are getting to know taxes even with an 18k 401k, 3.5HSA contribution. You should be phased out of any Traditional IRA contribution breaks as well. You know your taxes better than me, but there must be something big I am missing here because the deductions you mentioned won't get your there.



https://taxfoundation.org/summary-latest-federal-income-tax-data-2015-update/

https://taxfoundation.org/how-many-taxpayers-fall-each-income-tax-bracket/

bacchi

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #32 on: October 22, 2017, 09:59:37 AM »
~50% of the US population doesn't pay federal income tax at all. We could jack up the rates to 100% for incomes over $1 million and it wouldn't come close to raising enough revenue to pay for some Bernie-style social programs. The reality is, and lefty Demos need to admit and come clean, that if we want universal health insurance, free public universities, free puppy daycare and lollipops, then taxes need to go up on the middle class, and a lot.

We already pay 2x what every other country does for sub-par health care.

Repeat after me: We already pay for it. We already pay for it. We already pay for it. We already pay for it. We already pay for it.


maizefolk

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #33 on: October 22, 2017, 10:16:29 AM »
@hgkkgkj

I don't know why you're complaining about threefive's tax returns to me, but it certainly does seem plausible for households with incomes as high at $150,000/year to pay no federal tax. If you want details, here's a helpful post on the subject http://rootofgood.com/make-six-figure-income-pay-no-tax/

The fact that definition of who is wealthy (and who is middle class) varies a lot with the income of the person listening does matter, because it is easy for politicians to say "we should raise taxes on the wealthy but not on the middle class":

  • The guy making $45k/year will think "yeah, let's raise taxes on the rich folks with six figure incomes, not middle class folks like me"
  • The woman making $100k/year will think "yeah, let's tax those rich folks making $200k year, not middle class folks like me"
  • The family pulling in $240,000/year will tell themselves "yeah, let's tax those folks in the 1% (~$450,000/year), not middle class folks like me"

Great for winning elections (though not so great for governing).

If you don't think there is much debate about who is considered wealthy, read those great threads Travis posted from a while ago on this same forum.

threefive

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #34 on: October 22, 2017, 10:43:45 AM »
I don't know if I qualify as a Bernie-bro but I'll bite. It is bordering on intellectual dishonesty to look only at income tax and claim that poor and middle class people pay nothing.

Great. We agree. I never said the poor and middle class pay nothing. I said ~50% pay no federal income tax. The poor and middle class do pay for the few euro-style social safety net programs we do have in the US: SS and Medicare/Medicaid. My point was that if we want more such programs, then the poor/middle class will ultimately have to pay something more for those, and the rich (and that means a lot of people on this forum) a LOT more.

Quote
Takes an amazing person to come into a thread on steep cuts to 401ks and come out with the take, "actually i think we should take even more from the middle class and below." Jesus Fucking Christ.

I did not argue for or against either, just stating facts in what I thought was a clearly sarcastic tongue-in-cheek way. Sorry to give the impression that I've got my MAGA hat on. In fact, I'd be looking at a MUCH higher tax bill if Republicans manage to slash 401k deductions (which I doubt will actually happen). That is definitely not something I would want.

The fact is, if you want Euro-style social programs, you need Euro-style taxes, which means higher taxes on everyone. If you want a large euro-style social safety net like we have with Social Security, then everyone has to pay, like is the case specifically mentioned by sherr above. Everyone does pay for that and Medicare/Medicaid. Similarly, tuition-free universities and universal health care means everyone has to pay more taxes, not just rich people. One could argue most people would come out net ahead, with their premium payments to private corporations shifting to a bigger (but maybe net smaller) tax bill. That's still going to be a big ole' giant tax increase on the middle class with some clear winners and some clear losers with respect to the net.

Basically, we have an entire tax code where someone making $50-75k can pay 10% effective, I can pay almost nothing while making (low) six figures, someone making mid six figures pays 20% effective (maizeman, maybe), and Warren Buffet pays closer to 12%. That happens because of the ever expanding list of deductions and their weird rules. And so no one thinks I actually am wearing a red MAGA hat, Republicans are certainly going to make it worse.

Quote
BTW if you are married with a MAGI above 110k you don't qualify for the $1K child income tax credit. So not sure how you are doing it if your income alone is in the low 6s. Not sure how you are getting to know taxes even with an 18k 401k, 3.5HSA contribution. You should be phased out of any Traditional IRA contribution breaks as well. You know your taxes better than me, but there must be something big I am missing here because the deductions you mentioned won't get your there.

401a defined contribution plan + 403b + 457 + spousal IRA + student loan interest + health insurance premiums + child tax credit x 2 + MMM. I might actually qualify for a $400 saver's credit this year, which is asinine. There is a sweet spot in the tax code for a MMMer, and I'm right in the middle of it.

theolympians

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #35 on: October 22, 2017, 11:06:49 AM »
"I make six figures and pay almost nothing". I need your tax guy/gal. I make six figures and my deductions for taxes are insanely high. I max out my 457 in a hope it will dump me in a lower tax bracket.

obstinate

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #36 on: October 22, 2017, 11:47:04 AM »
I'm a six-figure earner in the US ... My effective federal tax rate will be <1% this year
Your federal income tax rate might be near zero. However, you pay a minimum of about 8% for FICA. Even then, this is a very uncommon scenario, and most people who believe it applies to them have simply confused their net taxes owed with their total tax. Normally AMT will prevent it unless you are just barely above $100k. If you have even $10k in income affected by AMT, then you will pay more than 1% of your income in federal income tax.

But there is a window in there between $100k and $120k where you can get your tax rate very low. After that, it shoots up rapidly.
« Last Edit: October 22, 2017, 11:51:21 AM by obstinate »

libertarian4321

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #37 on: October 22, 2017, 12:07:35 PM »
"I make six figures and pay almost nothing". I need your tax guy/gal. I make six figures and my deductions for taxes are insanely high. I max out my 457 in a hope it will dump me in a lower tax bracket.

Yeah, I was wondering about that too.

If he's making "6-figures" and pays "almost nothing," he's either cheating on his taxes, has an insane number of deductions (39 children perhaps?), or is really bad at math.

I do agree, howerver, that the lower classes and much of the middle class pay little or nothing in Federal Income Taxes.  But the threshold for "middle class" would be far below "6-figures."

A household income of even just $100k would put a household in the top 25% or so.  A more accurate description of "middle class" would be a household income in the $35k to $85k range, which would roughly cover the middle third of median household incomes.


Gin1984

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #38 on: October 22, 2017, 12:21:18 PM »
So people who upset about this, are you going to call/write your congressperson?  Or just complain here?

maizefolk

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #39 on: October 22, 2017, 12:28:15 PM »
I think it is quite plausible, and will refer people again to the  Root of Good post on ending up paying only $150 on $150,000 of income.

http://rootofgood.com/make-six-figure-income-pay-no-tax/

Zamboni

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #40 on: October 22, 2017, 01:02:01 PM »
Just posted here to chime that this was on the front page of my local Sunday paper this morning . . . and I am thoroughly pissed that it is even being discussed.

Fireball

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #41 on: October 22, 2017, 01:24:01 PM »
I think it is quite plausible, and will refer people again to the  Root of Good post on ending up paying only $150 on $150,000 of income.

http://rootofgood.com/make-six-figure-income-pay-no-tax/

Definitely plausible, but it does take a fairly specific situation to get it that low. Based on threads in the past, most MMM'ers in that income range pay around 10% which is pretty decent all things considered.

Zamboni

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #42 on: October 22, 2017, 01:43:37 PM »
Think about this: At $2400 saved a year, and in the absence of interest or market gains, average Joe has less than $100K in his retirement account after 40 YEARS of working and contributing the proposed maximum.

Basically they want even more people to have to work until they die . . . fuck those fuckers in congress who support this.

(and yes, I do understand there will be compound interest . . . but I think the less than $100K of contributions in a long, 40-year career is really telling.)

fattest_foot

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #43 on: October 22, 2017, 02:33:12 PM »
So people who upset about this, are you going to call/write your congressperson?  Or just complain here?

Nah, I'll let the lobbyists kill this one for me.

wenchsenior

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #44 on: October 22, 2017, 03:26:21 PM »
Of course I'll write/call if necessary, but it has to move beyond the wild-ass, no-source proposal stage before I bother.  We'll see what happens as an actual plan begins to take shape. 

I might suck it up and support this type of thing if were part of a balanced, fair Bowles-Simpson sort of tax overhaul.  As is, it's pretty amazing that a GOP gov't would even consider proposing this in the context of the rest of their proposals.  Even the W admin gave the poor and middle classes a small tax cut while ballooning the deficit and lining the pockets of the rich.   Now the party doesn't even seem to want to bother with their usual smokescreen of tax cuts for everyone.

Kind of ironic, because DH and I jokingly said after the election, "well, the GOP is about to shit on pretty much every principle we hold dear, but AT LEAST we'll get a little tax cut out of it."  But instead current vague plan would mean somewhere in the neighborhood of an 8-10K/year INCREASE in our taxes.  It's like bizarro world.

Taran Wanderer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #45 on: October 22, 2017, 11:43:08 PM »
Think about this: At $2400 saved a year, and in the absence of interest or market gains, average Joe has less than $100K in his retirement account after 40 YEARS of working and contributing the proposed maximum.

Basically they want even more people to have to work until they die . . . fuck those fuckers in congress who support this.

(and yes, I do understand there will be compound interest . . . but I think the less than $100K of contributions in a long, 40-year career is really telling.)

$2400 per year at 7.5% compounded rate of return ends up with $680,000.  Not exactly peanuts.  Of course if inflation is 2.5%, then the real value after 40 years is $237,000.

kayvent

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #46 on: October 23, 2017, 01:18:03 AM »
Think about this: At $2400 saved a year, and in the absence of interest or market gains, average Joe has less than $100K in his retirement account after 40 YEARS of working and contributing the proposed maximum.

Basically they want even more people to have to work until they die . . . fuck those fuckers in congress who support this.

(and yes, I do understand there will be compound interest . . . but I think the less than $100K of contributions in a long, 40-year career is really telling.)

$2400 per year at 7.5% compounded rate of return ends up with $680,000.  Not exactly peanuts.  Of course if inflation is 2.5%, then the real value after 40 years is $237,000.

That’s more than the average people save and one would still have taxable accounts to invest in.

CheapScholar

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #47 on: October 23, 2017, 07:04:26 AM »
Trump tweeted this morning that there will be NO changes to the 401K.

I realize I'm in the small minority on this board being a Trump supporter, but I was actually thinking all weekend that Trump might tweet something just like this!  I knew he wouldn't let me down, and now I feel silly for even thinking for a second Trump would support such an idea.  Best two votes I ever cast in my life (primary and general). 

capoevename

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #48 on: October 23, 2017, 07:04:40 AM »
https://twitter.com/realDonaldTrump/status/922428118685581313

Quote
@realDonaldTrump

There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!

capoevename

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #49 on: October 23, 2017, 07:09:01 AM »
Perfect example of why people need to read less news. Every little noise becomes a huge waste of time. All the hours wasted... Probably better to spend the time sharpening your skills or doing something that is actually fun.