Future of 401ks

[Trial153]

What's the penalty to take it out now? I need to go chase a white sheep.

10% plus the tax hit. It would have still been cheaper than the inflation that sheep hunts incurred.

In fact if you took a 10 years personal note for say 200K ten years ago and booked four hunts plus a mulligan …you’d have been ahead of inflation with a ten year term on the note

 

[ismith]

The congressional inside traders are selling along with several of the big billionaires, buying opportunity?

 

[ismith]

What's the penalty to take it out now? I need to go chase a white sheep.

Seibens have a whole hayfield full of white sheep, probably be pretty cheap to chase them if the dogs aren’t out there.

 

[longbow51]

I'll tell you a story. Our business had a 20% noncontributory (i.e. they paid nothing, we paid the whole thing) 401K for all employees, immediately vested. Total freedom in where they invested it, but "free" investment advice from a few sources.

When we closed ~ 20 years later (I went to MBA and leadership, other partners splintered), most (not all) just cashed theirs out, took the tax hit and bought something.

I had preached long-term, index funds, retirement security, and had professionals talk to them about tax-deferred, etc. Maybe we were bad salesman. Or, the desire for instant gratification driven by every social media platform is simply irresistible. Nevertheless, we are going to be facing a generation with no retirement savings, other than SS and minimal 401K.

Maybe the problem is that neither they nor their parents have ever been really poor (didn't go through the depression, so they can't conceive of real want, as the Boomers were constantly reminded of), but irregardless of the etiology of their attitudes, we are going to have a rude awakening when the now 40 somethings retire, if the statistics are correct.

 

[SD_Prairie_Goat]

Saw this was being thrown around as a possibility. As a younger guy I really hope it never goes through, but I've seen stupider legislation passed.

If they do take away the tax advantage, would make sense if they made the money more easily available for use, more roth ira rules for borrowing, which could then backfire by people draining their retirement for a boat. But I can't really see a way you can keep the 401k penalties for early withdrawal if you take away the tax advantage of the program

 

[buckbull]

It seems so crazy to me to read about situations like these and @LIK2HNT mention, after seeing how hard it is for legitimately sick people to get on it.

Is it crooked doctors fabricating the paperwork?

Good lawyers mostly. I have an ex BIL that worked at the steel mill. When he turned 40 he didn't feel like working. He shopped psychiatrics until he found one that said he was mentally ill. Lawyer told him he would be denied twice and then accepted on the 3rd time and that is exactly how it all played out. He has been on disability for about the last 15 years.

Funny enough, he cashed in his 401k and used it as a down payment for a SeaArk catfish boat that MSRP'd around $50k. Lost the boat to the bank within a year. Caught my personal best catfish, 52lb blue, on that boat.

When SS was started, there was 23 folks paying in to 1 receiving benefit. That ratio is now 3 to 1 (actually pretty close to 2 to 1). Last numbers I saw is that the average amount of children people are having is 1.8 so we are losing population. The numbers are quite a bit worse when looking at high wage earners which will indirectly have an impact to SS contributions.

SS administration website is very easy to sign up and you can use their calculator to determine what you would draw based on the age of retirement and your current salary trend. Of note, they have a warning that if nothing changes by 2035 (i believe that's the year) that you will only get 80% of what you are owed.

 

[SAJ-99]

What’s funny is most people don’t realize that the majority of the national debt is just intergovernmental debt, that’s essentially just “borrowing” money from SS so that it gets paid back with interest and thus is “invested”.

If we didn’t build F-35s and roads, SS would literally just be principle that shrunk due to inflation.

You bringup an interesting point. If the tax benefit of the 401(K) was eliminated, workers would push to be union and have some modified DB plan, because a corporation can continue to contribute pre-tax. Or everyone gets a plan under some new government rule and each citizen gets to choose the investments. Once drown out the screams of "Socialism", people might see some benefit in that, but it would replace SS. Without changes, SS will have no excess funds in 10yrs. I.e. what comes in for SS taxes gets paid out as benefits (yes, everyone's benefits will get cut). The problem is that without SS, the extra treasury issuance will have to be absorbed by the market. The point of this long post, if that happens, I would guess is the chance of ever again seeing a sub 3% mortgage are zero.

 

[BuzzH]

You bringup an interesting point. If the tax benefit of the 401(K) was eliminated, workers would push to be union and have some modified DB plan, because a corporation can continue to contribute pre-tax. Or everyone gets a plan under some new government rule and each citizen gets to choose the investments. Once drown out the screams of "Socialism", people might see some benefit in that, but it would replace SS. Without changes, SS will have no excess funds in 10yrs. I.e. what comes in for SS taxes gets paid out as benefits (yes, everyone's benefits will get cut). The problem is that without SS, the extra treasury issuance will have to be absorbed by the market. The point of this long post, if that happens, I would guess is the chance of ever again seeing a sub 3% mortgage are zero.

Benefits to SS will not be cut if those we elect want a future in Politics. It will get fixed like it always does.

People on both sides of the aisle, one in particular can scream all they want about "fiscal conservative", socialism blah, blah, this and that all they want. But, when it comes to their bottom line, tunes change. Change enough to elect someone that won't impact their bottom line.

 

[Sam Colt]

401ks are a juicy target. Studies show significant differences in 401k participation and savings between white individuals and people of color. I expect a call for re balancing based on racial hyperbole to boil up in the political and media spaces in our lifetimes.

What effect that will have on existing balances will be interesting to see.

 

[SAJ-99]

Benefits to SS will not be cut if those we elect want a future in Politics. It will get fixed like it always does.

People on both sides of the aisle, one in particular can scream all they want about "fiscal conservative", socialism blah, blah, this and that all they want. But, when it comes to their bottom line, tunes change. Change enough to elect someone that won't impact their bottom line.

Agree. I was mostly making the point that SS never goes away completely. Politicians have to either find a way to fund it (higher taxes either on % or raising max taxable income) or move to a different type of account, particularly one with a higher expected return. There is a lot of support on both sides for individual retirement accounts started and funded by the government, basically forcing people/companies to fund them. Think something like the Thrift Savings accounts for military and gov. Politicians won't do anything until the absolute last minute unless there is a replacement people are comfortable with. So some of these "replacement" ideas and changes will get more air-time now.

 

[LIK2HNT]

Good lawyers mostly. I have an ex BIL that worked at the steel mill. When he turned 40 he didn't feel like working. He shopped psychiatrics until he found one that said he was mentally ill. Lawyer told him he would be denied twice and then accepted on the 3rd time and that is exactly how it all played out. He has been on disability for about the last 15 years.

Funny enough, he cashed in his 401k and used it as a down payment for a SeaArk catfish boat that MSRP'd around $50k. Lost the boat to the bank within a year. Caught my personal best catfish, 52lb blue, on that boat.

When SS was started, there was 23 folks paying in to 1 receiving benefit. That ratio is now 3 to 1 (actually pretty close to 2 to 1). Last numbers I saw is that the average amount of children people are having is 1.8 so we are losing population. The numbers are quite a bit worse when looking at high wage earners which will indirectly have an impact to SS contributions.

SS administration website is very easy to sign up and you can use their calculator to determine what you would draw based on the age of retirement and your current salary trend. Of note, they have a warning that if nothing changes by 2035 (i believe that's the year) that you will only get 80% of what you are owed.

We are not losing population. We are losing the working population.

 

[LIK2HNT]

Most People nowadays do not want to save. They want to spend their money due to all the social media impact and the thought that they are missing something.

Few years ago a lady in the office asked me how I afforded to own multiple rental houses. She rented and could not afford to purchase a house. I explained to her about saving, finances, being lucky to invest how and where I did (except the ‘08 setback). And working twice as much as everyone else I knew.
Then she mentioned that she got a $600k settlement. When I asked her how much she invested or used towards a house she paused. Told me the Ex and her spent it traveling and playing for a few years.

 

[44hunter45]

Y'all need to stop this. I'm down $12k since this thread started. Obvious cause and effect here. When HT talks, people listen.

 

[Big Fin]

Sorry- yes, profit sharing. Not bonuses.

I wasn't questioning the legality or anything, moreso just wondering what the benefit/risk is of doing it that way. I'm such a damn pessimist on stuff like that, that I have no faith that I'll ever see that money.

There are benefits of doing a Profit Sharing contribution over year-end bonuses, depending upon the goals the company has and the relationship they have with employees. There can also be benefits of doing bonuses over a Profit Sharing contribution.

A Profit Sharing contribution is made in addition to any mandatory match the employer has elected on the 401(k) portion of the plan. A Profit Sharing contribution is completely discretionary. Most employers make that decision at the end of each year for a variety of reasons.

The tax code does give some incentives to doing a Profit Sharing contribution, versus a bonus. First, no payroll taxes on either the employee or employer, which combined is usually approximately 20%. That puts more money into the hands of the employee and employer in the long run. Second, there can be formulas and eligibility criteria that favor elderly employees, depending upon the type of plan it is, such as an "age-weighted" Profit Sharing Plan. That allows an employer to establish a plan, still in compliance with ERISA, with the intent of helping older employees closer to retirement age. As employees stick with them longer and get closer to retirement age, those longevity employees will eventually be the ones garnering a larger portion of the benefit. Third, an employer can defer the contribution to the retirement plan until the due date of the entity tax return, thus giving cash flow flexibility. Fourth, there can be forfeiture clauses for employees who terminate early and before being fully vested, with the forfeited amounts being reallocated among remaining participants. Fifth, well, too many to list. Lots of reason to do, or not do, a Profit Sharing contribution in lieu of year-end bonuses.

As to your concern that you "won't see that money," ERISA rules governed by the DOL are very strict rules regarding Defined Contribution Plans (401k, Profit Sharing, and Money Purchase Plans) that protect you from that concern. You should get an annual statement with your balances, your vested amounts, etc. You, or your estate, are entitled to that upon meeting the retirement or disability provisions outlined in the Retirement Plan Adoption Agreement your employer adopted. The plan features are communicated to participants in their Summary Plan Description.

The only way you won't see it is if it is invested in assets that lose all of their value (something no employer should allow) or a premature death.

This "tax theory" discussion has been going on for my 35 years as a tax accountant. So far, the third rail to never be touched has been qualified retirement plans such as 401Ks. I might be wrong, but I would be very stunned if qualified retirement plans were now subject to taxation in a different manner than they are today. Too many Americans are vested in them and a very large industry (Wall Street and associates) makes large contributions to politicians to make sure such never happens.

In my mind, this is "much ado about nothing."

 

[npaden]

This is already starting with Secure 2.0 which based on the headlines is supposedly securing our 401k plans but there are several things in there that are actually undermining them.

I don't think many companies are going to allow it, but the change to allow student loan repayment dollars to count as retirement contributions for matching purposes is pretty dumb in my opinion. Seems that counting paying off debt as saving for retirement doesn't quite work to me. I guess it gets something into those employees accounts which is better than nothing but I doubt may employers add that as an option. It isn't mandatory.

The other thing that you don't hear much press on is that the catch up contributions are going to start having to go into the Roth pot. So people over 50 at their peak earnings are going to have to pay tax on those dollars at their current tax rate if they want to save extra for retirement. I don't think many people in lower tax brackets are maxing out their 401k so this seems like a step in the direction you are saying where the idea is to increase current taxes no matter what. Generally the folks doing the catch up are folks in the higher tax brackets. I guess at least they are going to let us put it in a Roth where it can grow tax advantaged. I think we get another 2 years to put catch up contributions in as pre-tax but some plans actually could have switched to that this year. Our plan will put it off as long as we can.

 

[LIK2HNT]

Y'all need to stop this. I'm down $12k since this thread started. Obvious cause and effect here. When HT talks, people listen.

Don’t worry, two to three years ago I was losing more a month than the guys working for me made in a year. You just have to hold on. Things cycle.

 

[44hunter45]

Don’t worry, two to three years ago I was losing more a month than the guys working for me made in a year. You just have to hold on. Things cycle.

Not worried. There are many days my money makes more than I do.

 

[SAJ-99]

Generally the folks doing the catch up are folks in the higher tax brackets. I guess at least they are going to let us put it in a Roth where it can grow tax advantaged.

That is the argument to eliminate 401k- it only benefits the top 20%. This is true but the reason is the top 20% are the only people with a high enough income to save for retirement. It’s an income problem, which no one wants to address. But it reminds me that we discussed this Roth vs 401k a few times and have been clear to point out it is a tax bet. Who’s to say that the gains in the Roth won’t be taxed in 20yrs.

I certainly hope BiG fin is correct in it is much ado about nothing, but I get nervous when both sides agree on a solution when their end goals are different.

 

[SD_Prairie_Goat]

That is the argument to eliminate 401k- it only benefits the top 20%. This is true but the reason is the top 20% are the only people with a high enough income to save for retirement. It’s an income problem, which no one wants to address. But it reminds me that we discussed this Roth vs 401k a few times and have been clear to point out it is a tax bet. Who’s to say that the gains in the Roth won’t be taxed in 20yrs.

I certainly hope BiG fin is correct in it is much ado about nothing, but I get nervous when both sides agree on a solution when their end goals are different.

Really worries me when there's thirty years plus before a retire, a lot of time for politicians to finally figure out a way to screw us over.....

 

[Trial153]

That is the argument to eliminate 401k- it only benefits the top 20%. This is true but the reason is the top 20% are the only people with a high enough income to save for retirement. It’s an income problem, which no one wants to address. But it reminds me that we discussed this Roth vs 401k a few times and have been clear to point out it is a tax bet. Who’s to say that the gains in the Roth won’t be taxed in 20yrs.

I certainly hope BiG fin is correct in it is much ado about nothing, but I get nervous when both sides agree on a solution when their end goals are different.

Good point. It’s pretty hard to save for retirement when you don’t have the the cash flow needed to live on to begin with.
Here comes the …they shouldn’t buy coffee at the store three times a week , comments…