If you’re like most investors,, it is very likely that you have a 401k as part of your retirement plan. In fact, there’s a solid chance that your 401k could be the backbone of your entire financial portfolio. If this is the case, you definitely aren’t alone. They can supply you with a healthy amount of retirement income, there are tax benefits, and if you obtain one through your employer, you may receive matching contributions.
That being said, 401k plans could be in trouble. And we’re here to tell you exactly how…
Federal Government’s Massive Budget Deficit
Unless you’ve been living on the moon, you’ve surely been painfully aware of the deficit our country is facing. The federal government is trying to decide how exactly to bring down that iever-growing amount, and 401k plans could become a target. More precisely, proposals have recently been made that would target the tax benefits enjoyed by the contributions you make into your 401k. The effect would especially be felt by individuals with a higher income. The basic thinking is that the contributions you’ve been making into your 401k cannot be taxed right away, and that is something that has raised the eyebrows of a variety of lawmakers.
Flat Tax Credit Proposal
Last September, an idea was given to the U.S. Senate Finance Committee to help improve the country’s deficit. It was suggested that the pre-tax and tax-deductible contributions be replaced by a flat tax credit of 18%. This would go for both companies and their workers who contribute into these accounts and take advantage of their tax benefits. While this would raise $458 billion over the next decade for the government, individuals would be forced to pay taxes on any money contributed into their 401k accounts. Losing this benefit could be devastating, at least to those with a sizable amount of income.
Lower Income Would Benefit, Higher Income Would Suffer…
How you feel about this proposed change might very well have a lot to do with whether you are considered to be in the lower income or higher income bracket. Basically, this change would add an increased incentive for those in the former category, while those in the latter category would be negatively affected. Why? Because a 15% tax bracket would be the line dividing the two groups. If you are below this bracket, you would receive a greater benefit with this proposed “new” system. If you’re above the 15%, however, your benefit would decrease from how it exists in the current plan.
… Or Maybe the Higher Income Individuals Wouldn’t Suffer, After All
Despite the decrease that this proposed system would cause to pre-tax benefits, there is a good chance that most, if not all, higher income individuals wouldn’t be affected. This is because they would simply alter their financial portfolios to take this into consideration. In all likelihood, they would simply move the funds normally utilized for a 401k and other newly taxable accounts into a retirement account where contributions are not taxed. Shifting funds might be a bit of an inconvenience, but it’s something most higher income individuals would be fine with. Especially since many of them have a financial adviser that handles all of these issues for them. Plus, the lower income investors could really use an incentive, seeing as how a recent survey by EBRI found that barely a third of individuals earning less than a $35,000 yearly salary are currently saving for retirement.
