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

Posted: Nov 29, 2012 3:30 PM

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 nation’s debt problems. We’re about to find out if those fears—persistent for decades—have been justified.

Everything including the sacred mortgage deduction is on the table as lawmakers wrestle with the fiscal cliff, a year-end avalanche of scheduled spending cuts and tax increases. With a combined $10 trillion sitting in IRAs and 401(k) plans, retirement accounts make a juicy target. Some of this money has never been taxed, and under current law never will be.

The government argues that your 401k or privately saving for the future costs them money, when it isn't their money in the first place. They also argue that the 401k option doesn't increase savings and use this as an excuse to punish those who actually do save. 

Luckily, a "save my 401k" campaign has been launched to bring attention to this issue.