Taxing Tax-Deductions

Ike IkokwuThe Blog

It’s no secret the US Federal Government spends more than it brings in; nor is it news to anyone who’s been paying any attention this election season that the gap has increased exponentially within the last few years. In an ever ongoing attempt to reduce the trillion-dollar-plus deficits, politicians are always brainstorming new-fangled revenue sources to tap into instead of, God forbid, reducing their obscene spending of other people’s money. The latest government account yet to be pillaged is the $18 trillion or so in 401(k) accounts that are, at present, untaxed. According to a new proposal, all that may change.

 

Not only is there a plan under consideration to limit employer-employee 401(k) contributions to 20% up to a $20,000 ceiling, but the tax deductions would be replaced by an 18% credit sent directly to everyone’s retirement account; making any contributions to a 401(k) plan treated as taxable income. The credit is said to increase revenues by approximately $458 billion; another short term Band-Aid on a long term financial cancerous cliff, especially if programs like Medicare and Social Security are left rudderless.

 

What’s interesting to note here is the possibility of an unintended lesser-of-two-evils result for the taxpayer, assuming this outrageous and irresponsible proposal is given the green light. Who’s to say that your present tax deferral won’t wind up becoming a costly tax-procrastination when it’s time to retire, cash out and pay up? Getting it over with, a little at a time, one payment at a time, in order to enjoy a tax free harvest via ROTH plans and ROTH-LIKE plans, may very well be worth the temporary and immediate pain of taxable income you can’t spend. Not to mention the very real possibility that the tax rate, according to experts, will be higher at the time of the withdrawal than during the contribution process today. A possibility made ironically clearer by the very proposal laid out by a political system whose spending has reached a level of complete insanity.

 

Of course, none of this would be relevant if most workers opted out of the program and companies eventually eliminated the option all-together. Hopefully, someday they’ll finally realize you can’t simply tax your way out of a financial crisis.

 

Hopefully.