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Fiscal Cliff Idea: How About We Tax Your 401k?

Anthony16 Wrote: Nov 30, 2012 8:54 AM
They are already collecting taxes on 401k accounts. I have a 401k account and when I reached age 70-1/2, the IRS told me that I would be required to withdraw a certain percentage of money from my 401k and pay the taxes on it, whether I wanted to or not.
restoreliberty Wrote: Nov 30, 2012 11:23 AM
You are correct, if you are not working at age 70 and 1/2, you have to start taking mandatory distributions and paying taxes on the income earned. If you are still working, and not a 5% owner or direct relative of the owner (mother, father, son, daughter, wife, husband, etc. - all of which automatically make you a 5% owner whether you think you own any portion of the business or not) then you do not have to start taking mandatory distributions at 70 1/2.

If your 401(k) passes on to anyone else after you other than your spouse (who will pay tax on distributions as well) like your children, they will pay all of this tax within five years of your passing.

So, they already do collect taxes on 401(k) distributions.
restoreliberty Wrote: Nov 30, 2012 11:34 AM
What the government is looking at is the differential in tax rate - when you put that money in your 401(k) your tax bracket was most likely higher than the one your are in now. Here is why it matters: If you and your working spouse make $125K each, you are going to pay Obama's new "wealth tax", however, at that income level one of you can max out your 401(k) [up to 17,000 for 2012 and 17,500 for 2013], or the two of you could split the difference and each add as little as an additional $3,000-5,000 to your 401(k)s. Now, you still own your labor earnings, you make investment earnings, you have reduced your reduced your federal taxable earnings, and you now no longer fall under the "wealth penalty" higher rates.
cjurgens Wrote: Nov 30, 2012 11:21 AM
As far as I know, that was the rule for tax deferred accounts right from the beginning. Note that these are tax DEFERRED, not tax free accounts. The idea was to defer taxes from your high income years to your retirement years when you are most likely to have a smaller income and therefore a lower tax rate. The rules require withdrawing a certain percentage based on life expectancy. I turned 70-1/2 this year and have known from the start that I'd be required to pull out some money. I'll pay income tax on it and put the remainder in some other investment. At the end of it all, though, 401Ks have been a terrible investment. I would have been better off paying the taxes and putting the money in CDs.

How do you feel about the government touching your private retirement account known as your 401k in order to "pay down the deficit?" Not so good? Already feel like the government has stolen your retirement through Social Security? Well get ready because taxing the 401k is floating around as an idea while the fiscal cliff talks on Capitol Hill continue.

One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress would not be able to resist tapping it to help solve the...