Elimination of 401(k) tax deduction

[Physiciancouple.com]

www.politico.com/story/20…

 

How realistic is it to think this could become law? Right now my wife and I shelter about 75k/yr pretax and save 37k/yr in taxes because of this deduction.

[VagabondMD]

It is hard to see this administration getting anything off the ground, let alone a sweeping change of a well-established and popular retirement savings plan.

That said, some of the proposals that I have read suggest a hybrid pre-tax and Roth plan, with a lower ceiling for the pre-tax component, that makes some sense, and benefits lower income earners more than higher income earners, at least up front.

Nothing that I have read has suggested that tax reform proposed by this administration will materially benefit high W-2 wage earners (like docs), even less so those in HCOL areas.

[ajm184]

It depends on the ‘whole package’ being worked upon by Congress.  Next to the mortgage interest deduction, the pre-tax deduction status of 401k/IRA’s is near the top of breaks given to individuals (at least short term).  The object of ‘tax reform’ is remove ‘tax driven’ behavior by balancing the a. removal of tax breaks and b. lowering the taxation rate, c. a less burdensome tax calculation process for individuals and company’s.  A by-product imo will be an increase in taxes paid by people in the current 28% and up tax brackets and lower though wider base in the lower tax brackets.  Every PAC will proclaim their tax break to be the ‘end of the world’ (looking at you Real Estate folks); but simpler is better than complex.  Removing tax breaks makes saving, spending, and investment decisions a lot easier to individuals and business’s.

The politics:  Taxes is one of the few areas that appears to hold the President’s attention for more than a nanosecond besides NK.  It is also the only area where the President imo has made a coherent argument for tax reform.  Tax reform will cause a reckoning at the State and below level imo if the state and local taxes are not deductible going forward.  IMO federal taxation has enabled other taxing authorities cover to hide and there will be a lot more focus on the ‘value’ provided/focus on core functions versus the unvarnished cost going forward.   The challenge will be mitigating tax reform impact upon people and businesses in low cost versus high cost areas.

[Hatton]

It is hard enough to get the average person to save.  It would not surprise me to see a cap on total savings in retirement accounts of say 2-3 million.  I remember this being discussed when Romney was running for president.  Romney had >100 million in an IRA (imagine his RMD issue.) leading to the discussion on capping the total allowable amount to be annuitized to 200k or so.

[Peds]

in before the lock.....o wait!

 

realistic? probably not.

does it matter. no. we will still save a ton and have the 1st world problem of when to retire.

[DMFA]

Peds wrote:

in before the lock…..o wait!

 

realistic? probably not.

does it matter. no. we will still save a ton and have the 1st world problem of when to retire.

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Man, I haven't seen an ib4l post in a while...

"One idea quietly being discussed would be taxing the money that workers place into their 401(k) savings plans up front: an idea that would raise billions of dollars in the short-term and is pulled from the Camp plan. This policy idea is widely disliked by budget hawks, who consider it a gimmick; the financial services industry that handles retirement savings; and nonprofits that try to encourage Americans to save."

Taxing it up front...what, like making them all Roth instead?  It makes zero sense to give no tax advantage to 401(k) because they'd become useless.  If they all become post-tax but grow tax-free, like Roth, then that'd be a slight adjustment, but by no means earth-shattering.

[MPMD]

This admin can't fill undersec'y positions at State, they aren't going to get their way on tax reform.

It would be absolutely painful irony if all the surprisingly affluent people who voted for T woke up next year and found that their mortgage interest deduction was gone and that Steve Mnuchin was taxing their 401k.

[ITEngineer]

MPMD wrote:

It would be absolutely painful irony if all the surprisingly affluent people who voted for T woke up next year and found that their mortgage interest deduction was gone and that Steve Mnuchin was taxing their 401k.

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I'm not sure how many people who voted for Trump actually take the mortgage interest deduction. And those that did probably don't benefit much from it (15% tax bracket). I would love to see some demographic numbers here but it's well known that it's higher income individuals who get most of this benefit. I for one would love to see it eliminated. If you want to encourage home ownership turn it into a tax credit that all can use (but that's not fair to renters) or increase the standard deduction or expand the 10% tax bracket (if you think it should be revenue neutral)

Instead of putting a tax of 401k's it's probably wiser to cap their total size. But the tax man will get the money eventually when RMD kick in.

[ajm184]

ITEngineer wrote:

MPMD wrote:

It would be absolutely painful irony if all the surprisingly affluent people who voted for T woke up next year and found that their mortgage interest deduction was gone and that Steve Mnuchin was taxing their 401k.

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I’m not sure how many people who voted for Trump actually take the mortgage interest deduction. And those that did probably don’t benefit much from it (15% tax bracket). I would love to see some demographic numbers here but it’s well known that it’s higher income individuals who get most of this benefit. I for one would love to see it eliminated. If you want to encourage home ownership turn it into a tax credit that all can use (but that’s not fair to renters) or increase the standard deduction or expand the 10% tax bracket (if you think it should be revenue neutral)

Instead of putting a tax of 401k’s it’s probably wiser to cap their total size. But the tax man will get the money eventually when RMD kick in.

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Couple articles on US mortgage interest deduction; first one is on the percentage of people who take the deduction by income.  The second is the total amount of certain tax deductions.

https://dqydj.com/mortgage-interest-deduction-usage-by-tax-bracket/

http://www.pewresearch.org/fact-tank/2016/04/06/the-biggest-u-s-tax-breaks/

Though I get a mortgage interest deduction, I would not be opposed to seeing it eliminated as part of a larger package of 'tax reform'.  I simply don't think that the Federal Government should be in the business of encouraging home ownership.  A local community benefits, and therefore the choice to encourage home ownership should be decided at the local/county level versus the Federal.

I could also see changes to a 401K capping lifetime contributions (by employer and employee) in the $1.5 - $2 million range and move upward with inflation/CPI.  The cap would be lower if the Feds make contributions taxable upfront like a Roth versus the current pre-tax approach.

It will be interesting to discuss once a complete package is presented for legislative consideration.

[SwanSong]

Interesting world out there.  Pretty much the entire doctor's lounge voted for Trump this past election where I'm at, so hearing a different perspective is interesting.  We shall see how this plays out. There have been numerous measures floated that would help the working/middle class and be far less friendly to docs, particularly docs in high cost of living areas and just starting out in their careers.  For instance, increasing the standard deduction and eliminating deductions for state income taxes and property tax deduction would decrease the value of the mortgage interest deduction.  Decreasing the value of the mortgage interest deduction swings the balance away from owning a home and more towards renting, which would in turn likely lead to increased rent in the long-term (particularly in higher cost of living areas) as the equilibrium works its way out into more of a balance.

As for Trump not filling his cabinet, that has more to do with Democrats throwing a tantrum and not allowing multiple confirmations to occur per day as has been the custom with previous administrations.  I am less certain that many of these same Democrats are going to oppose all of these tax reforms, as they're pretty darn "progressive" as they have been set forth.  Perhaps there may be some opposition out of the simple fact that these proposals are really going to gore their donor class in states like California, New York, New Jersey and Illinois with high state taxes, expensive homes and corporate 401k plans.

Does all of this pass?  I doubt it.  The Republicans are pretty fractured based on the more corporate, moderate establishment class and the more conservative-leaning base, which is further split between traditional conservatism and more populist factions.  On taxing 401ks, mortgage interest, and taking away state income tax deductions, however, there may be some alignment in these groups with the Democrats.

[Craigy]

The question is if there will be any advantage to a 401k contribution going forward.  If it gets turned into a Roth, personally I'm ok with that, especially if the limits remain the same.  Retirement accounts going away, though, would seem like a hard pill to swallow for both sides of congress, particularly conservatives.  If we suddenly lose the 401k, or it just becomes some asset-protection vehicle, and gain nothing in return, that sucks.

Democrats will vote for elimination of tax-deferred 401ks because it increases the tax base.  Enough Republicans will vote for it if it's the only way to pass the tax reform package.  The only tax-base enlarger that many Democrats won't vote for is eliminating the state and local income tax deduction, since most of them hail from punitive income tax states to begin with.

As long as I don't end up paying more tax than before, I don't care if all of the deductions go away.  Personally I think that makes it easier, less gaming the system, puts everyone on a much more level paying field (well, as level as a graduated tax system can be).  I'd rather the brackets be lower to begin with, than the brackets be higher and have to scrounge for deductions.

Also, for what it's worth, I didn't buy a house so I could deduct my mortgage interest.  That's a nice bonus, I suppose it takes the edge off, but it didn't make a difference to me either way.  I don't think many other people buy houses because of the mortgage interest deduction either.  It's just a handout to homeowners by conservatives, for better or worse.  Charitable deductions, sure, that's half of how charities fund raise.  But nobody buys a bigger house so they can get a bigger deduction.

[VagabondMD]

Craigy wrote:

As long as I don’t end up paying more tax than before, I don’t care if all of the deductions go away.

I think that if everyone feels the same way, there cannot be any change. There will be winner and losers, and nobody wants to be a loser.

Craigy wrote:

But nobody buys a bigger house so they can get a bigger deduction.

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True, I no longer have a mortgage and therefore not a dog in this fight. I do believe that the mortgage interest deduction (by putting more cash in the pocket of homeowners with mortgages), consciously or subconsciously, helps to prop up the real estate market and would expect that if this were eliminated, home prices would soften.

[ITEngineer]

ajm184 wrote:

Couple articles on US mortgage interest deduction; first one is on the percentage of people who take the deduction by income.  The second is the total amount of certain tax deductions.

 

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It's interesting that they left off the 401k deduction. I wonder why?

[ajm184]

ITEngineer wrote:

ajm184 wrote:

Couple articles on US mortgage interest deduction; first one is on the percentage of people who take the deduction by income.  The second is the total amount of certain tax deductions.

 

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It’s interesting that they left off the 401k deduction. I wonder why?

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The article didn't leave it out.  The tax break estimate of the 401K deduction is under 'Contribution to and earnings of defined contribution retirement plans'. It is immediately above the mortgage interest deduction for owner occupied residences within the second link provided.

[ITEngineer]

ajm184 wrote:

ITEngineer wrote:

ajm184 wrote:

Couple articles on US mortgage interest deduction; first one is on the percentage of people who take the deduction by income.  The second is the total amount of certain tax deductions.

 

Click to expand…

It’s interesting that they left off the 401k deduction. I wonder why?

Click to expand…

The article didn’t leave it out.  The tax break estimate of the 401K deduction is under ‘Contribution to and earnings of defined contribution retirement plans’. It is immediately above the mortgage interest deduction for owner occupied residences within the second link provided.

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I totally missed that. Thx.