Author Topic: Biden wants big 401k changes  (Read 10841 times)

slappy

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Re: Biden wants big 401k changes
« Reply #100 on: September 22, 2020, 07:53:27 AM »
I wouldn't mind paying more taxes during my working years if Congress eliminated the 401k early withdrawal penalty permanently.

I don't think that'll ever happen.  The penalty is meant to discourage non-mustachians from withdrawing funds before retirement.  The people who write the laws -- they don't really consider the "fringe" cases where someone carefully plans their investments, expenses, SWR rates, and retires decades earlier than the typical American.

Fortunately, there are strategies you can employ such as Roth Conversion Ladder, or even SEPP/72t.

I think it's ultimately a moot point because of the following: Before COVID the personal savings rate hovered between 7-8%. At 8% it takes 56 years to become financially independent, which means the average person can't retire before social security. The government might as well let us have our own money.

I feel like if there was no penalty, people would raid the accounts more often and end up with nothing saved for retirement. I used to work at a bank and a local small business would come in every year with the SEP IRA contributions for the employees. All of the employees literally turned around and cashed the check and considered it a bonus. It was a huge pain because I had to open accounts for all of them, only to have them turn and around and just cash out. Plus, they didn't have retirement savings. I mean, in that case, the penalty didn't bother them, but hopefully the penalty bothers some people enough to look elsewhere if they need cash.

zolotiyeruki

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Re: Biden wants big 401k changes
« Reply #101 on: September 22, 2020, 08:11:53 AM »
This could be an interesting thought experiment--if we were in charge of tweaking retirement savings laws, how could we modify things so that responsible early retirees could access their funds penalty-free, while at the same time discouraging spendthrifts from blowing it all?

I suppose a 72t/SEPP sort of fits the bill, but I wish you could pull more than just a couple percent out each year.  Having not put enough in post-tax investments (roth, taxable) earlier, I'm now trying to figure out how to boost those accounts enough to set up a Roth ladder, while too much of my savings sit in the less-accessible tax-deferred accounts.

terran

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Re: Biden wants big 401k changes
« Reply #102 on: September 22, 2020, 09:46:44 AM »
This could be an interesting thought experiment--if we were in charge of tweaking retirement savings laws, how could we modify things so that responsible early retirees could access their funds penalty-free, while at the same time discouraging spendthrifts from blowing it all?

I suppose a 72t/SEPP sort of fits the bill, but I wish you could pull more than just a couple percent out each year.  Having not put enough in post-tax investments (roth, taxable) earlier, I'm now trying to figure out how to boost those accounts enough to set up a Roth ladder, while too much of my savings sit in the less-accessible tax-deferred accounts.

How about this: you can withdraw the amount you contribute to a Roth IRA at any time without tax or penalty. You can also covert from traditional to Roth (which is taxable, but no penalty) and as long as you wait 5 years (enough time to deter people who just want the money now) you can withdraw that amount without paying tax or penalty. That seems like it would work pretty well. It's also what we have.

I'm sure there are some tweaks that would simplify things (maybe just make it that anything that's been a Roth IRA for 5 years, including gains, can  be withdrawn), but I think the concept of a slightly convoluted process involving a waiting period does a good job of ensuring that only sophisticated investors who know what they're doing will withdraw, unless they're the type to completely ignore the penalty.

TomTX

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Re: Biden wants big 401k changes
« Reply #103 on: September 22, 2020, 11:14:35 AM »
https://apnews.com/1ef23f018730d2dd82545515878bf118
Ah, yes.  Of course, it'd only be accelerating the inevitable...

Last I checked, inflows would match outflows if they removed the income cap from SS tax. Similarly, funding would be more than solved by adding SS tax to cap gains.

joleran

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Re: Biden wants big 401k changes
« Reply #104 on: September 22, 2020, 12:23:32 PM »
Last I checked, inflows would match outflows if they removed the income cap from SS tax. Similarly, funding would be more than solved by adding SS tax to cap gains.

Doing this would probably introduce an "infinite bend point" after the current SS max with a shallow slope though, so outflows would increase.  Otherwise, everything over the current cap would just go "poof".  That is kind of like the ACA investment and medicare surcharge though, so not unprecedented.  Also wouldn't hurt early retirees even a little, so easy sell around here.

Edit:  Oh, not the SS tax to cap gains though - that would be absolutely terrible.
« Last Edit: September 22, 2020, 12:32:59 PM by joleran »

Zamboni

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Re: Biden wants big 401k changes
« Reply #105 on: September 22, 2020, 01:05:42 PM »
https://apnews.com/1ef23f018730d2dd82545515878bf118
Ah, yes.  Of course, it'd only be accelerating the inevitable...

My Mom was right there with your line of thinking 40 years ago, telling me she was absolutely sure she'd never get to collect social security. She has now collected it for 18 years as her sole source of retirement income. *shrugs*

Somehow, we've had government in those 40 years that has managed to not bankrupt social security. Trump's plan will do it in a very short period of time because **news flash** he doesn't care one iota if average Americans have to work until they die or live handicapped begging in a gutter.

zolotiyeruki

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Re: Biden wants big 401k changes
« Reply #106 on: September 22, 2020, 03:20:25 PM »
https://apnews.com/1ef23f018730d2dd82545515878bf118
Ah, yes.  Of course, it'd only be accelerating the inevitable...
My Mom was right there with your line of thinking 40 years ago, telling me she was absolutely sure she'd never get to collect social security. She has now collected it for 18 years as her sole source of retirement income. *shrugs*
In the last 40 years, we've also seen the full retirement age increased from 65 to 67, SS benefits have become partially taxable (and the thresholds are not indexed to inflation), and the FICA tax rate for SS has increased from 5% to 6.2%.
« Last Edit: September 23, 2020, 12:27:36 PM by zolotiyeruki »

TomTX

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Re: Biden wants big 401k changes
« Reply #107 on: September 22, 2020, 06:14:39 PM »
Last I checked, inflows would match outflows if they removed the income cap from SS tax. Similarly, funding would be more than solved by adding SS tax to cap gains.

Doing this would probably introduce an "infinite bend point" after the current SS max with a shallow slope though, so outflows would increase.  Otherwise, everything over the current cap would just go "poof".  That is kind of like the ACA investment and medicare surcharge though, so not unprecedented.  Also wouldn't hurt early retirees even a little, so easy sell around here.

Wouldn't be difficult to put a cap on payout at something like 250-300% of FPL, and that should resolve your payout concern.

Paul der Krake

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Re: Biden wants big 401k changes
« Reply #108 on: September 22, 2020, 06:40:12 PM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

Zamboni

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Re: Biden wants big 401k changes
« Reply #109 on: September 22, 2020, 07:09:12 PM »
^Yeah, that definitely describes my Mom! Lol, I lived in a sea of adult paranoia as a child.

The age for full benefits needed to go up since the average lifespan has gone up (at least it went up for awhile . . . I think now it might be flat or even going back down.) Modifications to benefits over time is reasonable. Doing something intentionally to wipe it out in a couple of years, which is essentially what Trump has proposed, is something else entirely.

I'm a red panda

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Re: Biden wants big 401k changes
« Reply #110 on: September 23, 2020, 06:24:50 AM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

Fiscal policy depends on leaders though. We currently have a leader who is intent on stopping social security. 

zolotiyeruki

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Re: Biden wants big 401k changes
« Reply #111 on: September 23, 2020, 01:35:46 PM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.
Fiscal policy depends on leaders though. We currently have a leader who is intent on stopping social security.
As unrealistic as Trump's proposal is, it doesn't sound like "stopping social security" is his goal.

I had to chuckle at this excerpt from the AP link: "It also could force people to cut back on the spending that drives growth so they can save for their own retirement and health care needs if they believe the government backstop is in jeopardy."  Oh, my, people might have to make sacrifices now to save up for their own retirement. quelle horreur C'mon, isn't this what this forum is all about?

This is one of the major reasons why I have a philosophical objection to subsidies.  Sure, it helps a few, but people/organizations/governments/companies develop a dependency on the subsidy.  And once a subsidy have metastasized, it's nearly impossible, politically speaking, to unwind it, no matter how bad the collective effect is on the country, because it's easy to find someone to put on the news that will suffer.

ChickenStash

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Re: Biden wants big 401k changes
« Reply #112 on: September 23, 2020, 03:36:21 PM »
Not that anyone would ask me, but if I had my way, I'd like to see the 401k-style plans combined with IRAs into one plan with much higher limits maybe 2-3x what they are today. It would be employer managed with matching, self-managed, or both (combined contribution limit applies). Allow Roth or traditional style contributions. Penalty-free withdrawal would be based on a "retirement test" of some sort - W2/1099 income < some multiple of the poverty line sounds good at first blush and that's fine if it picks up the temporarily unemployed. And for the big third-rail, SS (old age) distributions would be means-tested and phased out up to a small multiple of the poverty line (1.5x sounds good) with no salary cap for contributions and the distribution age indexed to some CDC/NIH/WHO life expectancy value.

That said, no one would ever do any of that because we'd probably wind up with nearly no one saving when they are young (like today) and most old people living on the streets fighting over who gets the new refrigerator box to sleep in.

Zamboni

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Re: Biden wants big 401k changes
« Reply #113 on: September 23, 2020, 04:42:53 PM »
Social security is collective American retirement and disability insurance that almost all working people are mandated to "pay premiums" into.

Having been to countries where there is no such safety net and seen first hand where that leads, I am perfectly content to pay into social security, and I'll be pretty pissed if the current corruption in our government messes it up.

Michael in ABQ

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Re: Biden wants big 401k changes
« Reply #114 on: September 23, 2020, 08:35:51 PM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

I have a healthy skepticism that I will receive "full" old age social security benefits in 30+ years when I'm eligible. Social Security is a pay as you go system. Ultimately it's all coming out of the same bucket of tax money, even if we have a payroll tax ostensibly dedicated to funding it. When we're down to 1 or 2 workers to pay for benefits for one retiree, it's not sustainable at the current level of benefits. Something will have to give. Older age to collect, lower benefits, or higher taxes.
« Last Edit: September 25, 2020, 07:47:50 PM by Michael in ABQ »

Paul der Krake

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Re: Biden wants big 401k changes
« Reply #115 on: September 23, 2020, 11:14:06 PM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

I have a healthy skepticism that I will receive "full" old age social security benefits in 30+ years when I'm eligible. Social Security is a pay as you go system. Ultimately it's all coming out of the same bucket of tax money, even if we have a payroll tax ostensibly dedicated to funding it. When we're done to 1 or 2 workers to pay for benefits for one retiree, it's not sustainable at the current level of benefits. Something will have to give. Older age to collect, lower benefits, or higher taxes.
Yes. Thatís fine. 0% and 75% (or whatever reasonable estimate you can come up with) are radically different outcomes. One of them invites healthy discussion. The other invites an eye roll.

Sugaree

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Re: Biden wants big 401k changes
« Reply #116 on: September 24, 2020, 06:23:08 AM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

I have a healthy skepticism that I will receive "full" old age social security benefits in 30+ years when I'm eligible. Social Security is a pay as you go system. Ultimately it's all coming out of the same bucket of tax money, even if we have a payroll tax ostensibly dedicated to funding it. When we're done to 1 or 2 workers to pay for benefits for one retiree, it's not sustainable at the current level of benefits. Something will have to give. Older age to collect, lower benefits, or higher taxes.

I agree.  I generally only factor in 75% of what the current estimated payments are. 

wenchsenior

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Re: Biden wants big 401k changes
« Reply #117 on: September 24, 2020, 08:22:49 AM »
When someone tells you they aren’t going to collect Social Security because it will be broke, this is as certain a sign as you’re ever going to get that this person doesn’t understand a thing about fiscal policy and you can stop listening now.

I have a healthy skepticism that I will receive "full" old age social security benefits in 30+ years when I'm eligible. Social Security is a pay as you go system. Ultimately it's all coming out of the same bucket of tax money, even if we have a payroll tax ostensibly dedicated to funding it. When we're done to 1 or 2 workers to pay for benefits for one retiree, it's not sustainable at the current level of benefits. Something will have to give. Older age to collect, lower benefits, or higher taxes.
Yes. That’s fine. 0% and 75% (or whatever reasonable estimate you can come up with) are radically different outcomes. One of them invites healthy discussion. The other invites an eye roll.

Exactly. It's crazy to me that people really think they will get "literally nothing" back from SS.  You might get less than promised, but you aren't going to get nothing unless the number of people employed in the U.S. goes to zero.  I also assume ~ 75% of currently promised benefits.

dresden

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Re: Biden wants big 401k changes
« Reply #118 on: September 25, 2020, 09:03:22 AM »
I am politically independent, but definitely am more concerned about what will happen to ACA at this point.  It seems like with a change to the supreme court it could be gone by the end of the year.

That would impact many early retirees and people planning to retire early.

Schaefer Light

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Re: Biden wants big 401k changes
« Reply #119 on: September 25, 2020, 03:56:40 PM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

I have a healthy skepticism that I will receive "full" old age social security benefits in 30+ years when I'm eligible. Social Security is a pay as you go system. Ultimately it's all coming out of the same bucket of tax money, even if we have a payroll tax ostensibly dedicated to funding it. When we're done to 1 or 2 workers to pay for benefits for one retiree, it's not sustainable at the current level of benefits. Something will have to give. Older age to collect, lower benefits, or higher taxes.
Yes. Thatís fine. 0% and 75% (or whatever reasonable estimate you can come up with) are radically different outcomes. One of them invites healthy discussion. The other invites an eye roll.

Exactly. It's crazy to me that people really think they will get "literally nothing" back from SS.  You might get less than promised, but you aren't going to get nothing unless the number of people employed in the U.S. goes to zero.  I also assume ~ 75% of currently promised benefits.
My concern is that some type of means-testing will be implemented and people who have saved a lot of money for retirement won't get squat.  A politician could easily spin this into something along the lines of: "millionaires shouldn't be collecting SS when that money could be going to struggling/disadvantaged/poor/minority seniors who weren't able to save for retirement".  It's really class warfare (and not lack of funding) that makes me think I could end up getting nothing.

robartsd

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Re: Biden wants big 401k changes
« Reply #120 on: September 25, 2020, 04:30:54 PM »
The CARES Act does add a 2020-only $300 deduction against charitable contributions for people who claim the standard deduction.
No, the $300 above the line deduction for those who do not itemize deductions does not expire; however the increased limits for itemized deduction of charitable contributions are only for 2020.

robartsd

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Re: Biden wants big 401k changes
« Reply #121 on: September 25, 2020, 05:02:10 PM »
I'm assuming Biden's idea for refundable tax credit instead of deduction would be for contributions to accounts that otherwise would behave like traditional 401k/IRA accounts. I'm not sure how much I care about the difference. I think I'd benefit from such a plan (above median income, but relatively low income for this forum).

As far as other reforms that would increase tax liability of the wealthy, my favorite would be taxing capital gains at the same rate as ordinary income. Simplify tax structure and take away the biggest structural advantage the wealthy have without putting much extra burden on top earners.

I would consider increasing (or eliminating) the cap on wages subject to SS. I don't think FICA taxes should apply to capital gains (but if needed, revenue from changing capital gains to be taxed the same as income could be used to shore up FICA programs). The way the bend points work, I see the space before you hit the first bend point as simply paying for your retirement benefit. Above the first bend point, you're funding the disability insurance part of SS, by the time you reach the second bend point, you've already paid for any benefits you could ever receive and are subsidizing those who earn less. I'm sure high earners wouldn't like having even more of their income subject to this, we can at least let them get the tiny extra SS retirement benefit later.

LetItGrow

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Re: Biden wants big 401k changes
« Reply #122 on: September 26, 2020, 12:12:25 PM »
When someone tells you they arenít going to collect Social Security because it will be broke, this is as certain a sign as youíre ever going to get that this person doesnít understand a thing about fiscal policy and you can stop listening now.

I have a healthy skepticism that I will receive "full" old age social security benefits in 30+ years when I'm eligible. Social Security is a pay as you go system. Ultimately it's all coming out of the same bucket of tax money, even if we have a payroll tax ostensibly dedicated to funding it. When we're done to 1 or 2 workers to pay for benefits for one retiree, it's not sustainable at the current level of benefits. Something will have to give. Older age to collect, lower benefits, or higher taxes.
Yes. Thatís fine. 0% and 75% (or whatever reasonable estimate you can come up with) are radically different outcomes. One of them invites healthy discussion. The other invites an eye roll.

Exactly. It's crazy to me that people really think they will get "literally nothing" back from SS.  You might get less than promised, but you aren't going to get nothing unless the number of people employed in the U.S. goes to zero.  I also assume ~ 75% of currently promised benefits.
My concern is that some type of means-testing will be implemented and people who have saved a lot of money for retirement won't get squat.  A politician could easily spin this into something along the lines of: "millionaires shouldn't be collecting SS when that money could be going to struggling/disadvantaged/poor/minority seniors who weren't able to save for retirement".  It's really class warfare (and not lack of funding) that makes me think I could end up getting nothing.

Yeah, this is a worry. Talk about driving a divide potentially into some chunks of society.

Paul der Krake

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Re: Biden wants big 401k changes
« Reply #123 on: September 26, 2020, 02:56:47 PM »
My concern is that some type of means-testing will be implemented and people who have saved a lot of money for retirement won't get squat.  A politician could easily spin this into something along the lines of: "millionaires shouldn't be collecting SS when that money could be going to struggling/disadvantaged/poor/minority seniors who weren't able to save for retirement".  It's really class warfare (and not lack of funding) that makes me think I could end up getting nothing.
There is no scenario in which ďa politicianĒ spins up the need for means testing and decides to exclude millionaires out of their SS benefits.

First, it would require an act of Congress. Itís pretty darn hard to be elected to Congress, so there tends to be almost only high earners and millionaires in both chambers. Good luck convincing them to cut themselves out of their own contributions.

Second, means testing only really works for poor people when we want to make sure they donít get too much free food or whatever. You canít realistically means test millionaires because wealth takes too many forms. Real estate. Trusts. Blind trusts. Business interests. Unexercised options. Everything I just listed, but the overseas kind. There are tens of millions of millionaires in this country, and they all they have their unique way of being wealthy. Unless you hire a million accountants and enforcement officials, good luck getting any sort of legislation with actual teeth.

Seriously people. Worry about more pressing things. We know SS will likely change in our lifetimes, because literally no wide reaching program stays unchanged for 50 years. No need to jump to the worst possible outcome.
« Last Edit: September 28, 2020, 02:04:08 AM by Paul der Krake »