Forbes: Your 401k might get pushed off the cliff

[Honest Abe]

This is a scary thought, but I didn't realize that the revenue lost by the government via tax-advantaged retirement accounts is more than even the mortgage interest deduction! Here's the link to the thought-provoking article:

http://www.forbes.com/sites/nextavenue/2012/12/29/watch-out-your-401k-is-being-targeted/

 Now the likelihood of completely eliminating this vehicle for retirement seems small to me personally, since they're also trying to find ways to reduce SS benefits. However I can see them nibbling around the edges a bit. For example, I'm a public employee with a pension... They could eliminate or restrict my 403b contributions since one could argue that I don't "need" a tax-advantaged vehicle to retire.

Anyhoo, crazy stuff... This is why it pays to pay attention I guess!

[kkbmustang]

That's definitely on their radar. If you remember before EGTRRA (the statute that increased the 401k pre-tax limits in 2001) the amounts were a lot lower. It's entirely possible the amounts will be reduced to pre-2001 amounts. That is the statute that also implemented catch-up contributions.

[c]

My 401k is one of my big money concerns. Not so much that they will lower contribution limits, as I'll just put the money else where, but that they'll do something to raise taxes, or institute a fee on existing balances. It's actually my largest asset, by quite a bit, as for many years it was my only savings. I worry that they will tax 401k withdrawals at a higher rate going forward or do something to penalize those with higher balances (compared to the "average, less than 10k in savings" person), also there's a strong chance I will not live in the US during retirement, so that's another avenue of revenue - higher taxes for non-residents.

On the other hand I don't want to lose out by giving in to hysteria. This year I really pulled back on my contributions but then worried that was the wrong thing to do, so did a massive push to max out (which I missed by 2k).

What to do? There's a lot to consider.

[Honest Abe]

While on one hand, they're the government and they can basically change the rules whenever and however they want... Usually when they make such a sweeping change in benefits they do it in a way that offends the smallest number of people or just people who don't know enough to care (ie changing SS benefits for people who are under 50.) I can see them changing the rules on future deposits, not past... But like I said they can do what they want.

[TomTX]

I'm really not that worried about a proposed $20,000 cap on 401(k) contributions. There's still Roth IRA space, or *gasp* investments I can actually easily access during early retirement.

[sheepstache]

While on one hand, they're the government and they can basically change the rules whenever and however they want... Usually when they make such a sweeping change in benefits they do it in a way that offends the smallest number of people

I have been wondering if, strategically, it's better to have a bunch of kids to pay into a social security system or if it's better to have fewer kids so they aren't a large enough voting bloc to vote for cuts in benefits :)  Point is, what happens to the boomers isn't a good way to predict what will happen to future generations at retirement since those future generations will probably be proportionately smaller.

[Jamesqf]

I have been wondering if, strategically, it's better to have a bunch of kids to pay into a social security system or if it's better to have fewer kids so they aren't a large enough voting bloc to vote for cuts in benefits :) 

Strategically, it's better to build up enough of a stash so that you don't have to depend on SS for the basics.

As for your personal kids, it depends.  Considered from a purely econominc perspective, they're a pretty expensive & risky up-front investment - say $10K/kid for 18 years, then $70K college.  Would you be better off financially putting the $250K in a good mutual fund, or taking the chance that the kid's going to become wealthy (and grateful!) enough to support you in your retirement, rather than expecting on-going support from you.

[smalllife]

I have been wondering if, strategically, it's better to have a bunch of kids to pay into a social security system or if it's better to have fewer kids so they aren't a large enough voting bloc to vote for cuts in benefits :) 

Ethically, I am against bringing a human being into this world who is looked upon as "social security back up". You should have kids only if you truly want to have and raise them, not as a retirement plan.  Even if you have kids they should not be counted as a part of your retirement plan - stand on your own two feet first and anything they help with is extra. 

[sheepstache]

To be clear, yes I am talking about my demographic, not my personal decision to have kids and I am doing so tongue-in-cheek.  I thought it was obvious I couldn't as an individual have a large enough number of children that they could be referred to as a voting bloc but I guess medical technology is pretty astounding these days.

Strategically, it's better to build up enough of a stash so that you don't have to depend on SS for the basics.

Well sure, you need a solid back-up plan, but I'm saying strategically why not play the game right to squeeze the system for all you can?  (Still tongue-in-cheek, people.)  Really we could have any number of children so long as we raise the voting age to 65 once I get there.

[tooqk4u22]

I have been wondering if, strategically, it's better to have a bunch of kids to pay into a social security system or if it's better to have fewer kids so they aren't a large enough voting bloc to vote for cuts in benefits :) 

Strategically, it's better to build up enough of a stash so that you don't have to depend on SS for the basics.

As for your personal kids, it depends.  Considered from a purely econominc perspective, they're a pretty expensive & risky up-front investment - say $10K/kid for 18 years, then $70K college.  Would you be better off financially putting the $250K in a good mutual fund, or taking the chance that the kid's going to become wealthy (and grateful!) enough to support you in your retirement, rather than expecting on-going support from you.

This is actually a very interesting question - the boomers are the largest voting block and are pandered to by the politicians.  Intuitively you would think that not having a kid (or more) would be the better financial choice, which it might be on an individual basis but multiplied seveal times over it would result in declining population growth.   Regardless of all the other economic drivers, population growth matters more than everything else to a specific economy.  If the US economy can't replace its population faster than we are dying then economically we will suffer.

Although I think my current boss hired me partly because I have multiple children and a stay at home wife, which in his eyes means stability and confidence to succeed so maybe having more kids was a better decision financially.

Also keep in mind that the echo boomers/millenials are a generation that are as large as the boomers but they are economically not sound (no jobs), but when the boomers retire or die this generation will be fairly powerful and influential.

[Jamesqf]

Regardless of all the other economic drivers, population growth matters more than everything else to a specific economy.  If the US economy can't replace its population faster than we are dying then economically we will suffer.

I don't think the hypothesis that population growth is necessary for economic growth is supported by the facts.  The only country I can think of with a declining population - Japan - is still economically healthy.  On the other hand, there are any number of examples where population growth goes hand-in-hand with economic stagnation or even decline.

Even if it was supported, it leaves us with a choice between two unpleasant alternatives: declining population producing economic decline, or growing population producing environmental disaster.

[destron]

Regardless of all the other economic drivers, population growth matters more than everything else to a specific economy.  If the US economy can't replace its population faster than we are dying then economically we will suffer.

I don't think the hypothesis that population growth is necessary for economic growth is supported by the facts.  The only country I can think of with a declining population - Japan - is still economically healthy.

Japan's economy has been famously stagnant for 20+ years since their bubble popped and economists agree that population decline and lack of immigration are the main causes.
 

Even if it was supported, it leaves us with a choice between two unpleasant alternatives: declining population producing economic decline, or growing population producing environmental disaster.

I would rather deal with economic "decline", or having less, than the environmental disaster. It is likely to happen in the US as well in the next 60-100 years. We may not see it, but our children and grandchildren will.

[Ben]

Usually when they make such a sweeping change in benefits they do it in a way that offends the smallest number of people or just people who don't know enough to care (ie changing SS benefits for people who are under 50.) I can see them changing the rules on future deposits, not past... But like I said they can do what they want.

I agree that changes to future contributions is most likely... with the possible exception of taxing Roth withdrawals for the 'wealthy' in the distant future.

[Another Reader]

I don't think withdrawals from a Roth would be taxable.  That money is comprised of after-tax contributions plus earnings and gains.  It's possible the earnings and gains would be taxable to high income folks, similar to the taxing strategy in play in Washington today.  If someone tried to tax withdrawals, everyone would pull out their contributions and folks over 59 1/2 would pull everything out. 

It's possible that the Roth could disappear as a future option, if the tax numbers made sense to the parasites in DC.  Some folks think the RMD's of the 401(k) type plans and traditional IRA's are designed to smooth the revenue flow by guaranteeing older folks with significant savings don't stop paying taxes when they retire.  If you have a paid off house and Social Security, the RMD's may be a lot more income than you need.  You probably have no deductions, so you have no tax shelter, and your effective tax rate is higher.  Sort of a back door inheritance tax on estates less than the threshold.

[Jamesqf]

I don't think the hypothesis that population growth is necessary for economic growth is supported by the facts.  The only country I can think of with a declining population - Japan - is still economically healthy.

Japan's economy has been famously stagnant for 20+ years since their bubble popped and economists agree that population decline and lack of immigration are the main causes.

"Stagnant" is such a loaded word.  It implies that growth is the normal & necessary state of affairs.  If you say instead that Japan has managed to attain something approximating a comfortable steady state, you'd be much closer to reality.  As for population growth/immigration, just where the heck are they supposed to put more people?  They've currently got ~127 million people crammed into a land area smaller than California.