Congress is coming after your 401(K)

75% of Americans disapprove of the job our representatives are doing. It’s things like this that explain why:

While only about 13% of US employees nationwide enjoy a retirement fund that ensures a stable income for life, all 535 members of Congress do… courtesy of Uncle Sam.

Members of Congress participate in the Federal Employees Retirement System, which provides pension benefits most working Americans can only dream of.

Private retirement savers often pay management fees that can exceed 1% per year for poor investment choices. Members of Congress pay a maximum of 0.039% for guaranteed funds to match the market.

A proposal floating around Republican circles in Washington would add insult to injury: They want to end the tax deduction of your pension contributions so they can give a $1.5 billion tax break to American corporations.

oops.

Give and take

Congress is reportedly considering reducing the benefits of contributing to a 401(k) and similar retirement plans.

That’s because he wants to reform corporate taxes, cutting the rate from 35% to 15%. That opens a meteorite-sized hole in the federal budget.

Cue the pension police.

According to the latest report from the Joint Committee on Taxation, the exclusion of contributions and earnings from defined contribution plans will cost the federal government more than $584 billion over the next five years.

The new proposal would treat all contributions from traditional IRAs and 401(k) accounts as if they were contributions from Roth IRAs. You would lose the tax exclusion on those contributions, but your future earnings and 401(k)/IRA appreciation would be tax-free. Some think this could raise $1.5 trillion in additional tax revenue over the next decade, making the corporate tax cut feasible.

Unless they decide to tax retirement earnings and appreciation as well.

End of the Roth?

At this time, any income and earnings generated by your 401(k) and/or Traditional IRA are not taxed until you make withdrawals.

But a new proposal would impose a 15% tax on those annual profits, raising another $1.5 trillion over the next decade. However, that would be even worse than ordinary taxable investment accounts, where one can defer capital gains tax simply by not selling shares.

“It’s really not a question of if retirement plans will be cut, but by how much,” said Bradford Campbell, former assistant secretary of Labor for employee benefits under President George W. Bush. Replacing revenue lost from tax cuts, he said, is “a game of winners and losers, and the retirement system is bound to be one of the losers.”

My sources in Washington tell me that the Trump team is definitely planning to push through a tax reform like President Ronald Reagan’s in 1986, closing loopholes and lowering rates. It will not be just a tax cut, as had been rumored.

Like the retirement contribution exclusion, the proposals also eliminate state and local income tax deductions. If you live in a place like New York or California, it’s a big problem.

Who cares?

There is no more controversial topic in American politics than federal tax reform. So who is likely to win and lose if tax reform follows President Donald Trump’s proposals?

First, his administration cannot count on the unconditional support of the voter base that put Trump in the White House.

Although low-income voters would likely be neutral, since they tend not to have 401(k) plans or IRAs, households making $50,000 or more, the majority of whom voted for the president, would be hit hard if contributions for retirement were taxable. in the front.

High-income families probably don’t care one way or the other, since they tend to hit their retirement contribution limits pretty quickly anyway.

Second, the corporate side of the proposals is tense. Although Trump’s plan cuts the corporate rate from 35% to 15%, many American corporations already pay less than 15% thanks to loopholes, especially in power, utilities and heavy industry.

They will likely oppose the plan since it closes those loopholes. That makes the step uncertain.

How to prepare

The uncertainty around something we’ve come to take for granted—tax-advantaged retirement plans—means you need to urgently look for alternatives.

One is to explore the benefits of investing directly in the stock market. Long-term buy-and-hold strategies may become more attractive than retirement funds, depending on how capital gains are treated in any tax reform plan.

Another alternative is to consider the advantages of life insurance.

Certain types of whole life policies are much better than traditional retirement vehicles. This is because the IRS currently treats “distributions” from such policies as non-taxable loans against the policy, withdrawn when paid at your death.

Life insurance trusts, on the other hand, could become much more attractive vehicles for transferring money to your heirs if returns relative to IRS estate accounts take a nosedive.

Whatever happens, I will closely follow developments… and offer you solutions.

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