401K plans part of fiscal cliff negotiations

[tailfins]

Of course the pensions of government employees are off limits, but everyone else's retirement is fair game.

http://www.wcax.com/story/20215563/peoples-united-fiscal-cliff-your-401k

[Kathianne]

Of course the pensions of government employees are off limits, but everyone else's retirement is fair game.

http://www.wcax.com/story/20215563/peoples-united-fiscal-cliff-your-401k

If I read this right, the government is looking to discourage savings? While the money is deductible years that one is working, the taxes come due with retirement. BTW, if one makes early withdrawals, the penalties are quite high-I know, I had to do so several times to help my kids at one time or another while they were growing up.

[Trigg]

Of course the pensions of government employees are off limits, but everyone else's retirement is fair game.

http://www.wcax.com/story/20215563/peoples-united-fiscal-cliff-your-401k

well sure that makes sense, if I were the one changing the rules I'd make my self exempt as well.

I can just imagine the conversation.

should we tax everyones 401k?

"everyones"?,

well, just the citizens

In that case, sure, lets do it!!

[Kathianne]

Aha!

http://business.time.com/2012/11/28/fiscal-cliff-why-congress-might-have-to-mess-with-the-401k/?iid=biz-main-lead



Fiscal Cliff: Why Congress Might Have to Mess with the 401(k)

By Dan Kadlec (http://business.time.com/author/dankadlec/)

One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress (http://topics.time.com/congress/) would not be able to resist tapping it to help solve the nation’s debt problems. We’re about to find out if those fears—persistent for decades—have been justified.

Everything including the sacred mortgage deduction is on the table as lawmakers wrestle with the fiscal cliff (http://topics.time.com/fiscal-cliff/), a year-end avalanche of scheduled spending cuts and tax increases. With a combined $10 trillion sitting in IRAs and 401(k) plans, retirement accounts make a juicy target. Some of this money has never been taxed, and under current law never will be.

To maintain this savings incentive the government “spends” $100 billion a year in the form of tax breaks to those who stash money in these kinds of accounts. Now, a new study (http://obs.rc.fas.harvard.edu/chetty/ret_savings.html) suggests this tax incentive does little to change saving behavior. Some lawmakers, no doubt, are wondering: Why keep an expensive tax incentive that does not incent?

...


So hold on to your wallet. Congress has many options when it comes to tapping this vast reservoir. It could eliminate the deduction altogether or just for top earners, further restrict the amount that is deductible (currently $17,500; for those over 50, $23,000), start taxing retirement savings growth, or take back the part that has grown tax-free.

In the throes of a retirement savings crisis, none of these options is appealing. But that last one is most troublesome. At stake is any savings that has accrued tax-free in a Roth IRA. Tax-deferred growth could be a target too if you find yourself in a lower tax bracket in retirement. There is no discernible momentum behind such measures. But a retroactive tax on this sheltered income has been a worry from the start. And now these accounts have a meaningful total—and everything is on the table.