Penalties for savers, subsidies for the rest

This is just awful, particularly the suggestion that Congress might tax savings built up in 401ks. I have generally dismissed individuals who’ve suggested the government would confiscate these savings as cranks, but I’m beginning to wonder. I don’t know who is leaking these ideas, and they still strike me as long shots or bargaining chips, but they stink:

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.

Combined with the expiration of the capital gains rates, this tax cycle could be hugely punitive to savers. Shall we penalize savings and subsidize all stupid behavior?  Shall we deepen the divide between lenders and spenders?

The article makes reference to a study showing that the 401k incentive makes little difference. As far as taxing the built-up savings, this is a complete non-sequitur. It might constitute an argument for changing the deduction/exemption going forward, but hardly for screwing people who did what the government suggested.  Furthermore, the study acknowledges that they work in combination with automatic withholding.

I suspect it is being floated as an alternative to proposals to means-test benefits, which would be deadly for the entitlement-addicted interests in Washington.  But depriving savers of that future government income is a lot more palatable, and a lot more consistent with how people think about savings.

401k plans are clearly the biggest benefit for upper-middle income people, who can afford to put some money away and get employer matches in their plans. Once again it is likely to be those who have earned income, not piles of wealth, who get screwed.

Why would I ever participate in another government incentive plan if the government just claws it back?

DISCLAIMER: I’m biased – I just paid a lot of current taxes to convert to a Roth IRA. If they claw that exemption back I’ll end up paying twice as much tax as everyone else.  I’d be lying if I told you that doesn’t provoke an emotional reaction.

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