Author Topic: Republicans Consider Sharp Cut in 401(k) Contribution Limits  (Read 80775 times)

Scandium

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #100 on: October 26, 2017, 12:35:19 PM »
This was our breakfast discussion this morning. It sucks that the 401k is tied to your employer. I could see giving up 401k under the following:

-raise IRA limits - this could even be a compromise. Raise IRA limits to ~$18k, therefore the total contributions allowed are now less than they were before, but still significant.
-require those companies offering direct deposit to offer a paycheck split (many already do, even if few take advantage of it) so that pay can be directly deposited to IRA. Perhaps even have employers take this deposit into account when withholding taxes. So, it would work similar to a 401k, but the employee would have more control (ie, avoid admin fees, choose funds, new job would be contributing to the same account, etc.)
Yes, just raise IRA limit to $18k, and remove 401ks altogether. Much simpler. I'm sure some system of tax reduction at withholding can be figure out.

To be fair most middle class people don't save much in 401k anyway so this is really a tax break for the relatively rich. Or at least upper middle class and up. As all tax deductions are. I'm not sure this is the best target (mortgage deduction..?) but it does mainly benefit wealthier people.

shotgunwilly

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #101 on: October 26, 2017, 12:47:47 PM »
Typical... people gather their pitchforks and start bashing Trump as if he is the one that came up with this proposal for a change in their precious 401k plan... then when he defends the 401k plan, they're all "Well now he's a jackass for changing his mind!" *multiple shouts in agreement* "Witch! Witch!" XD

Ridiculous.

doneby35

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #102 on: October 26, 2017, 12:51:03 PM »
They would actually need to raise IRA limit to 18,000 + 5,500 = 23,500.
Removing 401k alltogether also removes employer contributions.

Also, i don't think Trump is defending anything. After saying there would be NO change to 401k, a day later he backtracked. Trump signs whatever lands on his desk by the GOP, even if 401k was to be eliminated.

rab-bit

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #103 on: October 26, 2017, 12:52:40 PM »
They would actually need to raise IRA limit to 18,000 + 5,500 = 23,500.
Removing 401k alltogether also removes employer contributions.

Also, i don't think Trump is defending anything. After saying there would be NO change to 401k, a day later he backtracked. Trump signs whatever lands on his desk by the GOP, even if 401k was to be eliminated.

I agree with this, Trump just wants to "win".
« Last Edit: October 26, 2017, 01:02:16 PM by rab »

Scandium

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #104 on: October 26, 2017, 01:10:53 PM »
They would actually need to raise IRA limit to 18,000 + 5,500 = 23,500.
Removing 401k alltogether also removes employer contributions.

Also, i don't think Trump is defending anything. After saying there would be NO change to 401k, a day later he backtracked. Trump signs whatever lands on his desk by the GOP, even if 401k was to be eliminated.
Right. I make too much for the IRA deduction so I only get the $18k. I think it would be fine to just make it $18k total (since it mostly benefit wealthy), but the number could certainly be tweaked. Focus should be simpler system with more choice (benefit workers) and taking burde of employers. Win-win.

I don't think it's an unsolvable problem to send employer contributions to IRAs. Or you could just raise everyone's salary by an equal, after tax amount. No difference.

Eric

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #105 on: October 26, 2017, 01:11:51 PM »
They would actually need to raise IRA limit to 18,000 + 5,500 = 23,500.
Removing 401k alltogether also removes employer contributions.

Also, i don't think Trump is defending anything. After saying there would be NO change to 401k, a day later he backtracked. Trump signs whatever lands on his desk by the GOP, even if 401k was to be eliminated.

I agree with this, Trump just wants to "win".

Do you think he's tired of winning so much yet?

https://www.youtube.com/watch?v=daOH-pTd_nk

OurTown

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #106 on: October 26, 2017, 01:26:24 PM »
This is a terrible plan.  If you assume a married couple in the 25% nominal tax bracket that maxes out his and hers 401(k)s, that is a $9,000 tax increase per year.  That is a massive tax increase on people who are exercising financial responsibility. 

I would submit to you that most married mustachians would withdraw less than $72k/year during retirement years, meaning that they would be taxed in the 15% nominal bracket upon withdrawal.  If you Rothify these funds, they will pay 25% up front and withdraw tax-free (principal & gains) on funds that would have otherwise been taxed in the 15% bracket.  That's not winning.     

Gin1984

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #107 on: October 26, 2017, 01:26:46 PM »
I don't get people sometimes.  Instead of complaining on here, call your rep, email your rep, especially if they are part GOP.  If they hear enough people saying no, it won't go through but if you wait until it is an main part of their plan, you won't be able to change a damn thing.  Why not DO something?

How do you know people aren't doing that? The two acts aren't mutually exclusive.
Honestly, because when the idea of doing something was brought up on this board, every person who responded said they would not.  Not one person said they would. 

DarkandStormy

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #108 on: October 26, 2017, 01:33:19 PM »
https://finance.yahoo.com/news/republicans-may-planning-slash-amount-133442541.html


they are trying to spin it as "good for millennials" HAHA

Did I miss something or does the article not explain why it's better for millennials? I see that in the headline, but not in the article.

Quote
"If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let's say the person's tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending."

Author assumes Roth 401(k) contributions will still be alive (why?) and that people will be in the 20% tax bracket in retirement (really?).  Some study apparently shows Roth contributions = more in retirement or some hocus pocus.
« Last Edit: October 26, 2017, 01:36:55 PM by DarkandStormy »

I'm a red panda

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #109 on: October 26, 2017, 01:35:54 PM »
I don't get people sometimes.  Instead of complaining on here, call your rep, email your rep, especially if they are part GOP.  If they hear enough people saying no, it won't go through but if you wait until it is an main part of their plan, you won't be able to change a damn thing.  Why not DO something?

How do you know people aren't doing that? The two acts aren't mutually exclusive.
Honestly, because when the idea of doing something was brought up on this board, every person who responded said they would not.  Not one person said they would.

My senators and representative, both state and national are on my phone's speed dial.

I don't JUST complain on the internet. I call, frequently.

DarkandStormy

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #110 on: October 26, 2017, 01:36:14 PM »
Typical... people gather their pitchforks and start bashing Trump as if he is the one that came up with this proposal for a change in their precious 401k plan... then when he defends the 401k plan, they're all "Well now he's a jackass for changing his mind!" *multiple shouts in agreement* "Witch! Witch!" XD

Ridiculous.

You must have missed the part where he backed off defending the 401k plan.  In 48 hours.

Ridiculous.

DarkandStormy

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #111 on: October 26, 2017, 01:38:39 PM »
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).

Quote
President Trump said Wednesday changes to retirement savings accounts could still be included in the Republican tax plan, backing away from his previous insistence they not be touched.
 
“Maybe it is and maybe we’ll use it as negotiating,” Trump told reporters at the White House.

I'm not even bothering with writing the punch line for you.

CheapScholar

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #112 on: October 26, 2017, 01:41:51 PM »
I called my Senator today.  More importantly, I called both offices for my member of Congress, as she is a Republican and on Ways & Means.  I also demanded to know when her next town hall meeting is, as I have several questions about the 401(k) aspect of the tax bill.  I used to work in a congressional office.  Nothing gets more attention that nuts calling in and demanding to know when the next town hall is.

Anyway, I'd encourage everyone to call their reps.  The truth here is that calling Republican reps is 1,000 times more helpful, and calling reps on Ways & Means does even more for us.  I'd encourage everyone to call Kevin Brady (Texas) and tell him what a fat piece of crap he is - or troll him on Facebook.

Zamboni

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #113 on: October 26, 2017, 01:53:17 PM »
Thanks to a healthy dose of NC gerrymandering, my representative is a democrat . . . no need to call and pester his staff about it.

Both of my state's senators are Republicans, but they are clearly such jerky boys of huge proportion that I doubt either cares what we think. They care so little it makes me long for ole Jesse . . . which I never thought would happen.

OurTown

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #114 on: October 26, 2017, 01:53:40 PM »
I called my Senator today.  More importantly, I called both offices for my member of Congress, as she is a Republican and on Ways & Means.  I also demanded to know when her next town hall meeting is, as I have several questions about the 401(k) aspect of the tax bill.  I used to work in a congressional office.  Nothing gets more attention that nuts calling in and demanding to know when the next town hall is.

Anyway, I'd encourage everyone to call their reps.  The truth here is that calling Republican reps is 1,000 times more helpful, and calling reps on Ways & Means does even more for us.  I'd encourage everyone to call Kevin Brady (Texas) and tell him what a fat piece of crap he is - or troll him on Facebook.

Thank you, I also called today.  I am noticing both left- and right- wing opposition to this shit sandwich.  Hopeful sign?

OurTown

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #115 on: October 26, 2017, 02:06:51 PM »
The financial services industry is strongly against.  Surely they can't pass this.  Stop calling me Shirley.

ZiziPB

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #116 on: October 26, 2017, 02:07:40 PM »
No need to call in my case as our congressional delegation is 100% Democrats.  They are all great and do an excellent job.  Both senators (Blumenthal and Murphy) are very vocal on the issues I care about.  On the other hand, I may call and let them know that I'm very happy with what they are doing :-)

I'm a red panda

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #117 on: October 26, 2017, 02:12:29 PM »
It's not a bad idea to call reps who agree with you too. If only to let them know which issues their constituents feel most strongly about.  You'd hate for the "compromise" to be on the issue you really care about.

boarder42

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #118 on: October 26, 2017, 02:14:00 PM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.

dandarc

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #119 on: October 26, 2017, 02:16:21 PM »
The financial services industry is strongly against.
Well yeah - now that people are (slowly) wising up to the fees issue on the retail side and on the institutional side, small-business retirement plans are one of the few things left that they can charge enormous fees on.

doneby35

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #120 on: October 26, 2017, 02:31:09 PM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.

Explain how please? if i'm not able to contribute 18,000 pre-tax into my 401k every year and instead only able to contribute 2,400 pre-tax, how does that not hurt?

boarder42

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #121 on: October 26, 2017, 02:32:40 PM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.

Explain how please? if i'm not able to contribute 18,000 pre-tax into my 401k every year and instead only able to contribute 2,400 pre-tax, how does that not hurt?

if you're able to contribute 18k to your 401k you're a rich person in this country.

OurTown

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #122 on: October 26, 2017, 02:36:30 PM »
It would hurt me and I'm not rich.  Yet.

doneby35

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #123 on: October 26, 2017, 02:38:40 PM »
Not really, my annual expenses are 15k, and therefore I'm able to contribute 18k to 401k. I thought most mustachians can do that with salaries around 60k. That's middle class.
The ones who already have a good amount contributed to their 401k over the years and are close to FIRE would be less affected than the rest who are still 7-10years away.

OurTown

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #124 on: October 26, 2017, 02:39:55 PM »
https://dqydj.com/net-worth-percentile-calculator-united-states/

FWIW, I am at percentile 81.  The "top 1%" starts at $10M.  The "top 0.1%" starts at $43M.

OurTown

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #125 on: October 26, 2017, 02:41:32 PM »
http://graphics.wsj.com/what-percent/

Individual income I'm at 95th percentile.  Okay, maybe I am rich.

Luck12

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #126 on: October 26, 2017, 03:01:36 PM »
Just made a few calls on this.  People, take action and call! 

boarder42

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #127 on: October 26, 2017, 03:05:59 PM »
Not really, my annual expenses are 15k, and therefore I'm able to contribute 18k to 401k. I thought most mustachians can do that with salaries around 60k. That's middle class.
The ones who already have a good amount contributed to their 401k over the years and are close to FIRE would be less affected than the rest who are still 7-10years away.

this is true but i'd say mustachians are the outlier here not the norm for society.  and the vast majority of people who max out their 401k's are the rich.

DavidAnnArbor

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #128 on: October 26, 2017, 03:41:53 PM »
Not really, my annual expenses are 15k, and therefore I'm able to contribute 18k to 401k. I thought most mustachians can do that with salaries around 60k. That's middle class.
The ones who already have a good amount contributed to their 401k over the years and are close to FIRE would be less affected than the rest who are still 7-10years away.

this is true but i'd say mustachians are the outlier here not the norm for society.  and the vast majority of people who max out their 401k's are the rich.

But even people who don't contribute to the maximum are hurt by this. Say someone that was intending to put $6k into the traditional 401k.

More importantly, why should a group of middle to upper middle income people have to forego this tax deduction so that people like Donald Trump can avoid the estate tax ?
Makes no sense whatsoever.

sokoloff

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #129 on: October 26, 2017, 03:43:32 PM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.
Explain how please? if i'm not able to contribute 18,000 pre-tax into my 401k every year and instead only able to contribute 2,400 pre-tax, how does that not hurt?
if you're able to contribute 18k to your 401k you're a rich person in this country.
Disagree. I've been maxing my 401K contributions since my mid 20s. No way was I rich at 27 making about $65K/yr. (20 years later, I am, but I was pumping the 401K full long before any reasonable definition of "rich" applied.)

MrMoneySaver

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #130 on: October 26, 2017, 04:04:09 PM »
This potentially affects anyone who intends to put more than $2,400 a year into a 401k, so it's an issue that extends far beyond the rich.

doneby35

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #131 on: October 26, 2017, 04:19:08 PM »
This potentially affects anyone who intends to put more than $2,400 a year into a 401k, so it's an issue that extends far beyond the rich.

Exactly. Everyone needs to call their state reps and make a big deal about this now before it's too late.

sol

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #132 on: October 26, 2017, 05:18:40 PM »
The hard part about evaluating these proposals in isolation is that you never get the whole picture.  Are they reducing the 401k limit but increasing the Roth limit or the Savers credit?  Are they phasing out deductibility with income, or ending the 401k program entirely?  Are they proposing some alternative retirement savings vehicle with different rules?

I'm reluctant to throw a fit until I see an actual bill, but unfortunately the new GOP legislating strategy seems to be to hide details until the last possible minute, then pass something quick before anyone has time to understand what's really in it.  They've tried the same strategy with every piece of legislation thus far, avoiding bipartisan compromise or even open floor debate, trying to push through secret plans without discussion or review.

This is no way to run a country.

sokoloff

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Luck12

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #134 on: October 26, 2017, 05:57:41 PM »
This is no way to run a country.
Yes, it's appalling to use such tactics.

Really?  You're linking to a page with "Mitch Mcconell, Senate Majority Leader" as the header and republicanleader.senate.gov in the name of the link?   Not biased at all!  LOL. 

https://www.snopes.com/aca-versus-ahca/

http://www.politifact.com/truth-o-meter/article/2017/jun/20/7-questions-about-senate-health-care-bill-and-tran/

https://www.c-span.org/video/?292260-1/white-house-health-care-summit-part-1

Let's put this bullshit myth to rest that Obamacare was as secretive a process as RepubliCONcare.  For fuck's sake.   Fuck is wrong with some of you people?    Little wonder I have such little faith in humanity!
« Last Edit: October 26, 2017, 05:59:22 PM by Luck12 »

aspiringnomad

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #135 on: October 26, 2017, 05:58:04 PM »
This is no way to run a country.
Yes, it's appalling to use such tactics.

^ Thanks for the fact-based, nonpartisan source. Certainly no room for political spin on a politician's website...

Anyway, if they gut the 401(k) in exchange for a tiny percentage of the population being able to pass their estates onto their kids tax free (just joking about that whole equality of opportunity thing!) then I expect there will be some political consequences. Republicans might lose even more of the middle to upper middle class suburban vote that used to be an important chunk of their base, but I suppose the parties have already been realigning along educational lines anyway.

Personally, I don't care much either way. I can easily adjust to whatever shakes out and nothing about tax reform is necessarily permanent anyway - it can be reversed in the event of another wave election or fiscal crisis. What's harder to reverse is nuclear war or the continued debasement of our country and its institutions. If there are some Rs continuing to hold their nose for the sake of tax reform, then hopefully its passage will speed the groundswell of conscientious Republican objectors to 45.

Gin1984

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #136 on: October 26, 2017, 05:58:18 PM »
The hard part about evaluating these proposals in isolation is that you never get the whole picture.  Are they reducing the 401k limit but increasing the Roth limit or the Savers credit?  Are they phasing out deductibility with income, or ending the 401k program entirely?  Are they proposing some alternative retirement savings vehicle with different rules?

I'm reluctant to throw a fit until I see an actual bill, but unfortunately the new GOP legislating strategy seems to be to hide details until the last possible minute, then pass something quick before anyone has time to understand what's really in it.  They've tried the same strategy with every piece of legislation thus far, avoiding bipartisan compromise or even open floor debate, trying to push through secret plans without discussion or review.

This is no way to run a country.
They said they want to get rid of the savers credit because it is underutilized.

boarder42

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #137 on: October 26, 2017, 07:57:36 PM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.
Explain how please? if i'm not able to contribute 18,000 pre-tax into my 401k every year and instead only able to contribute 2,400 pre-tax, how does that not hurt?
if you're able to contribute 18k to your 401k you're a rich person in this country.
Disagree. I've been maxing my 401K contributions since my mid 20s. No way was I rich at 27 making about $65K/yr. (20 years later, I am, but I was pumping the 401K full long before any reasonable definition of "rich" applied.)

20 years ago you were making 67k and you don't think you were rich. You have a very warped view of income levels. That's 103k in today dollars at 27. I'd guess less than 2% of 27 year olds make that much money

This is laughable

teen persuasion

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #138 on: October 26, 2017, 09:11:33 PM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.

Changing 401k limits hurts low income people who use EITC.  If this change were enacted, it would cost us close to $5k in lost credits (federal and state, because state is a percentage of federal credit), and maybe $2600+ in additional tax.  That would definitely slow down our path to FIRE, since I use those refunds to fund our Roth IRAs.

Some posters were of the opinion that simply eliminating the 401k altogether and increasing the IRA contribution limits would be good enough (may have been on another thread on this same topic).  This is also problematic for EITC eligible families.  Contributions thru payroll 401k lower AGI and line 7 wages (EITC tests both), but IRA contributions only lower AGI.  Thus IRAs are not equivalent and useless for EITC eligibility, unless some type of payroll deduction can be added.

Taran Wanderer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #139 on: October 26, 2017, 09:14:39 PM »
Changing 401k limits hurts low income people who use EITC.  If this change were enacted, it would cost us close to $5k in lost credits (federal and state, because state is a percentage of federal credit), and maybe $2600+ in additional tax.  That would definitely slow down our path to FIRE, since I use those refunds to fund our Roth IRAs.

Some posters were of the opinion that simply eliminating the 401k altogether and increasing the IRA contribution limits would be good enough (may have been on another thread on this same topic).  This is also problematic for EITC eligible families.  Contributions thru payroll 401k lower AGI and line 7 wages (EITC tests both), but IRA contributions only lower AGI.  Thus IRAs are not equivalent and useless for EITC eligibility, unless some type of payroll deduction can be added.

I don't want to see the 401k limit get changed downward, and nothing against you, but this comment is a great example of why the tax code is too complicated and needs to be simplified.

ZiziPB

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #140 on: October 27, 2017, 04:23:19 AM »
Changing 401k limits hurts low income people who use EITC.  If this change were enacted, it would cost us close to $5k in lost credits (federal and state, because state is a percentage of federal credit), and maybe $2600+ in additional tax.  That would definitely slow down our path to FIRE, since I use those refunds to fund our Roth IRAs.

Some posters were of the opinion that simply eliminating the 401k altogether and increasing the IRA contribution limits would be good enough (may have been on another thread on this same topic).  This is also problematic for EITC eligible families.  Contributions thru payroll 401k lower AGI and line 7 wages (EITC tests both), but IRA contributions only lower AGI.  Thus IRAs are not equivalent and useless for EITC eligibility, unless some type of payroll deduction can be added.

I don't want to see the 401k limit get changed downward, and nothing against you, but this comment is a great example of why the tax code is too complicated and needs to be simplified.
I wholeheartedly agreed about the need for simplification, but do you honestly think that the current proposal actually accomplishes that?

Indexer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #141 on: October 27, 2017, 05:22:48 AM »
Changing 401k limits hurts low income people who use EITC.  If this change were enacted, it would cost us close to $5k in lost credits (federal and state, because state is a percentage of federal credit), and maybe $2600+ in additional tax.  That would definitely slow down our path to FIRE, since I use those refunds to fund our Roth IRAs.

Some posters were of the opinion that simply eliminating the 401k altogether and increasing the IRA contribution limits would be good enough (may have been on another thread on this same topic).  This is also problematic for EITC eligible families.  Contributions thru payroll 401k lower AGI and line 7 wages (EITC tests both), but IRA contributions only lower AGI.  Thus IRAs are not equivalent and useless for EITC eligibility, unless some type of payroll deduction can be added.

I don't want to see the 401k limit get changed downward, and nothing against you, but this comment is a great example of why the tax code is too complicated and needs to be simplified.
I wholeheartedly agreed about the need for simplification, but do you honestly think that the current proposal actually accomplishes that?

NOPE.

The plan they all ran on, Paul Ryan's "Better Way" tax plan, would have been a giveaway to the rich but it also simplified the tax code. While I didn't agree with everything, specifically the top bracket %, most of it was a step in the right direction. That plan didn't call for weakening retirement plans. It actually called for expanding them with the creation of a new simplified retirement plan called a USA(Universal Savings account). It would act like a Roth without the penalties for early withdrawals.

The only way limiting 401ks to $2400 makes any sense is if they are trying to replace them with USA plans, but if that is the idea why don't they just say that? "We are removing all of your tax advantaged plans" sounds a lot worse than "we created a better simplified tax advantaged plan."

The Better Way tax plan also simplified capital gains taxation. Instead of LTCG having their own separate tax brackets the tax plan calls for LTCG being taxed at half of your normal rate. This ends up being pretty close to the current system

Source: https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf

boarder42

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #142 on: October 27, 2017, 05:31:42 AM »
Changing 401k limits hurts low income people who use EITC.  If this change were enacted, it would cost us close to $5k in lost credits (federal and state, because state is a percentage of federal credit), and maybe $2600+ in additional tax.  That would definitely slow down our path to FIRE, since I use those refunds to fund our Roth IRAs.

Some posters were of the opinion that simply eliminating the 401k altogether and increasing the IRA contribution limits would be good enough (may have been on another thread on this same topic).  This is also problematic for EITC eligible families.  Contributions thru payroll 401k lower AGI and line 7 wages (EITC tests both), but IRA contributions only lower AGI.  Thus IRAs are not equivalent and useless for EITC eligibility, unless some type of payroll deduction can be added.

I don't want to see the 401k limit get changed downward, and nothing against you, but this comment is a great example of why the tax code is too complicated and needs to be simplified.
I wholeheartedly agreed about the need for simplification, but do you honestly think that the current proposal actually accomplishes that?

NOPE.

The plan they all ran on, Paul Ryan's "Better Way" tax plan, would have been a giveaway to the rich but it also simplified the tax code. While I didn't agree with everything, specifically the top bracket %, most of it was a step in the right direction. That plan didn't call for weakening retirement plans. It actually called for expanding them with the creation of a new simplified retirement plan called a USA(Universal Savings account). It would act like a Roth without the penalties for early withdrawals.

The only way limiting 401ks to $2400 makes any sense is if they are trying to replace them with USA plans, but if that is the idea why don't they just say that? "We are removing all of your tax advantaged plans" sounds a lot worse than "we created a better simplified tax advantaged plan."

The Better Way tax plan also simplified capital gains taxation. Instead of LTCG having their own separate tax brackets the tax plan calls for LTCG being taxed at half of your normal rate. This ends up being pretty close to the current system

Source: https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf

I'd prefer elimination of income tax all together kill off a majority of the IRS as well as the large tax companies - who have huge lobbies so thats why this wont happen.  but movement to a sales tax based system eliminates many many loop holes people can jump thru to avoid taxes. 

Mr. Green

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #143 on: October 27, 2017, 05:42:54 AM »
I'd prefer elimination of income tax all together kill off a majority of the IRS as well as the large tax companies - who have huge lobbies so thats why this wont happen.  but movement to a sales tax based system eliminates many many loop holes people can jump thru to avoid taxes.
VAT all the way! Tax consumption and reward saving/investing. The gov't still wins in the end because money saved/invested eventually gets taxed via estate taxes or future spending.

Indexer

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #144 on: October 27, 2017, 05:59:58 AM »
I'm posting this separate from my last post because it is a completely different set of ideas.

While I benefit greatly from the 401k system, both personally(I max it out) and professionally(I work in investment management), I can see the benefit of switching the employee contributions to a Roth style system. The employer side should stay pre-tax, that is the incentive for the employer to do it. A Roth contribution doesn't benefit your employer, it only benefits you.

If we were starting from scratch, as opposed to editing an old entrenched tax system, we wouldn't include many of the things that are already in place. The USA(Universal Savings accounts) that have been proposed in the past make a lot of sense. Something that works like a Roth without the penalties and complex rules is much more simplified than what we have now. Why do we have a dozen different retirement plans, each with their own rules, and sometimes very very complicated conflicting rules?

Example: A Roth IRA has a 5 year limit before you can withdrawal earnings, and Roth 401ks also have a 5 year limit before you can withdrawal earnings. If you put $1 in a Roth IRA that starts your 5 year clock. If you put $18k/yr for 40 years into a Roth 401k, and then roll it into a brand new Roth IRA(never had one before) your 5 year clock has to restart. How does that make sense? It doesn't, but that is because adding the Roth IRA and the Roth 401k were two separate edits to the tax code and no one considered how they interact.

Many of us benefit from the 401k now, but if we were creating a new tax system from scratch would we include it? History lesson, 401ks were never expected to be main stream, and that is why their name is so odd. SEPs, SIMPLEs, Roth IRA, IRAs, Pensions, all have simple easy to remember names. 401ks are named after the section of the tax code, describing rules for profit sharing plans, that was used to create the plans. Section 401 - k.

Pre-tax contributions help you more and more the more income you have. They do benefit the upper middle class and the rich more than the lower middle class and the poor. If you are in the 10 or 15% bracket then a Roth is probably better. Once you get into the 33% bracket that is a harder argument. Pre-tax contributions also let you move your AGI which impacts a whole host of other things, effectively allowing people to manipulate the tax system to their own benefit. Example: I highly doubt that when they put the income limits for student loan deductibility in the 60k range they thought, "We don't want single people making 80k a year to benefit from this, UNLESS they are also contributing 18k/yr to their 401k and $3400/yr to their HSA. Then they most certainly can deduct student loan interest."

My point: while I benefit greatly from the current system, if I was creating a system from scratch this wouldn't be it. I don't know if the current proposals in Congress are a step in the right direction, because they haven't revealed them. These are just my thoughts on a better system.


Extra thoughts:  If you are maxing out your retirement account and you have a long time horizon, then Roth contributions are normally better "regardless" of income. The reason is that 18k in a Roth is effectively more money saved than 18k in a Trad. Comparing 10k in Roth to 13.3k in Trad turns into a fair mathematical comparison, and if your tax rate stays the same throughout life you will get similar answers, but if your tax rate falls at retirement the trad will look better and vice versa. However, if the accounts are maxed out the math gets complicated. 18k in a Roth VS 18k in a Trad+$5940 in taxable. Over the long term that taxable account drags down the overall after-tax performance. In 5 years it probably won't make a big difference. Over 40 years it's a different story and it makes the Roth look better even in extremes, like 33% bracket now and 15% in retirement. (This is just the math comparing Trad VS Roth. It doesn't take into account how pre-tax contributions affect AGI... which is another example of how complex our tax code is.)

The reason I bring that up, switching to USAs(a Roth w/o early w/d penalties) could help most Mustachians. Yes, we would lose our short term tax brakes, but we could benefit in the long term, and if the USAs don't have early withdrawal penalties then that removes the tax problems when retiring before 59 1/2. No more need for complex Roth conversion ladders.
« Last Edit: October 27, 2017, 06:04:06 AM by Indexer »

sokoloff

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #145 on: October 27, 2017, 06:05:28 AM »
I've been maxing my 401K contributions since my mid 20s. No way was I rich at 27 making about $65K/yr. (20 years later, I am, but I was pumping the 401K full long before any reasonable definition of "rich" applied.)
20 years ago you were making 67k and you don't think you were rich. You have a very warped view of income levels. That's 103k in today dollars at 27. I'd guess less than 2% of 27 year olds make that much money
$65K 20 years ago is a hair under $100K today. That's 87.6th percentile income today.

You're free to think that a household with very low net assets and making that income is "rich", but doing so basically requires at least 1/8th of the US to be "rich". I'm free to look at that same set of facts and conclude otherwise. The fact that that income is earned and assets held by a 27 year old or a 47 year old is irrelevant IMO to the "is this situation rich?" question.

sokoloff

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #146 on: October 27, 2017, 06:12:46 AM »
While I benefit greatly from the 401k system, both personally(I max it out) and professionally(I work in investment management), I can see the benefit of switching the employee contributions to a Roth style system. The employer side should stay pre-tax, that is the incentive for the employer to do it. A Roth contribution doesn't benefit your employer, it only benefits you.
@Indexer, rest of your post was very thoughtful and understandable, but this part I didn't understand.

How does a traditional 401K employer contribution benefit the employer in a way that a Roth-style employer contribution would not? Both would serve as a cost to the employer, reducing the employer's profit/tax. Both would serve as a retention/compensation incentive to the employee.

If you structured the employer contribution the same way you structure "gross pay" today (meaning you take a stab at what the taxed amount/withholding will be, but the employee remains responsible for settling up with the feds at the end of the year), I don't see how the traditional 401(k) is a benefit to the employer in a way that the Roth would not be.

Scandium

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #147 on: October 27, 2017, 06:41:52 AM »
changing 401k savings really only hurts rich people.  unless it goes up then it helps us.  Its an awesome tool but its far from necessary to reach FIRE.  and if its not there it just means less games i have to play with a roth ladder when i retire.
Explain how please? if i'm not able to contribute 18,000 pre-tax into my 401k every year and instead only able to contribute 2,400 pre-tax, how does that not hurt?
if you're able to contribute 18k to your 401k you're a rich person in this country.
Disagree. I've been maxing my 401K contributions since my mid 20s. No way was I rich at 27 making about $65K/yr. (20 years later, I am, but I was pumping the 401K full long before any reasonable definition of "rich" applied.)
The median household income is around $55k. You where making 20% more than that by yourself, and that was 20 years ago?! You were certainly wealthier than that majority of the population. I'd say that qualify as "rich".

Most middle class people and below can't afford to contribute much if anything to a 401k, and if they did most would only get a deduction in the 10% bracket (as Romney said 47% don't pay any federal taxes).

« Last Edit: October 27, 2017, 07:03:37 AM by Scandium »

sokoloff

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #148 on: October 27, 2017, 06:47:56 AM »
The median household income is around $55k. You where making 20% more than that by yourself, and that was 20 years ago?! You were certainly wealthier than that majority of the population. I'd say that qualify as "rich".
My records from that era indicate that my net worth was under $90K in 1997. That's under $140K in today's money. Is someone with $140K in assets today "rich"?

Do not confuse income with wealth. Income is, at best, the first derivative of wealth.

boarder42

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Re: Republicans Consider Sharp Cut in 401(k) Contribution Limits
« Reply #149 on: October 27, 2017, 07:26:07 AM »
The median household income is around $55k. You where making 20% more than that by yourself, and that was 20 years ago?! You were certainly wealthier than that majority of the population. I'd say that qualify as "rich".
My records from that era indicate that my net worth was under $90K in 1997. That's under $140K in today's money. Is someone with $140K in assets today "rich"?

Do not confuse income with wealth. Income is, at best, the first derivative of wealth.

argue the semantics of it all you want you were in the upper tier of the population in terms of both wealth and income particularly for a 27 year old.  You in no way shape or form needed any tax benefit the 401k provided.  there have been some who posted above who are getting to the EITC because of it and it strongly benefits them but you on the other hand.

140k for a 27 year old ranks in the 96th percentile.  you were rich regardless of if you want to admit it or not. 

and your income as indicated above puts you in the upper tier of earns not even considering age.

The point of my statement is by in large the 401k benefits the rich/wealthy/high income earners of which you entirely fit into each of these categories so further proving the point regardless of if you want to admit you were that well off or not.