Is Congress trying to screw over salaried employees?

[HalO'Thane]

Read recently on the Wall Street Journal

Grab Your Pitchforks, America, Your 401(K) May Need Defending from Congress

Not a well written article because you have to read several paragraphs before getting to the heart of the matter. It sounds like Congress is contemplating getting rid of the current 401K system where employees are able to sock money into retirement accounts pre-tax and instead move towards a system where your money is taxed first and then you can put that into a Roth style IRA. Most of us who are W2's contribute the max amount of $17,500 pre taxation and are usually near the top of the income tax bracket; which after federal, state, local, SS etc is close to 50% in taxes. With this alleged proposed system, won't the government essentially be stealing close to $9,000 from us per year? I don't see how that amount can be made up in a Roth IRA. Most of us when we retire will be at a much lower tax bracket because our cost of living will be a lot less and we will therefore be pulling less out of our retirement accounts per year, so I don't see how we will benefit just because we can withdraw from this Roth without being taxed. What I would also like to know is if employers would still have any incentive to match our contributions. If they do not, then that is another several thousand dollars per year taken from us.

Am I interpreting this article correctly? Many members of this forum are much more savvy than me with regards to finances so I wanted to post this article here for discussion.

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[facted]

This is a very speculative article to say the least. While certainly possible, there is no tax reform on the table at this time that touches 401k. Will that change? Possibly but 401k are very popular investment vehicles that lots of people have. I would think it would be deeply unpopular and would take a massive amount of political capital.

My advice: good thing to keep an eye on, but you can relax for now.

 

[GravelRider]

It really is only a matter of time until Congress finds a way to tap into the retirement savings of the middle class as a source of revenue. There's a huge amount of money there. It's bound to happen and bound to go unnoticed by the majority. 401ks are popular, but I think there is a large portion of the population who cannot describe what a 401k is and what it's tax benefits are.

 

[Man o War]

It really is only a matter of time until Congress finds a way to tap into the retirement savings of the middle class as a source of revenue. There's a huge amount of money there. It's bound to happen and bound to go unnoticed by the majority. 401ks are popular, but I think there is a large portion of the population who cannot describe what a 401k is and what it's tax benefits are.

Last I saw, the majority of the country saves nothing for retirement so that is probably true. Americans are pretty financially illiterate as a whole.

 

[anes121508]

Speaking of retirement plans....

Is there any way as an employee of an AMC with a poor benefit plan and no match whatsoever to opt out and create their own? Specifically a pretax savings vehicle that allows more than 18k/yr ? Is it possible to negotiate less salary and get employer to contribute to your 401k? Or does the 401k plan have to apply for all employees?

 

[doctalaughs]

Speaking of retirement plans....

Is there any way as an employee of an AMC with a poor benefit plan and no match whatsoever to opt out and create their own? Specifically a pretax savings vehicle that allows more than 18k/yr ? Is it possible to negotiate less salary and get employer to contribute to your 401k? Or does the 401k plan have to apply for all employees?

See if your 401k allows after tax contributions and in service withdrawals. WCI wrote awhile back how to get up to 53k into a roth even if you don't qualify for the income limit. It's not pre-tax money but still tax advantaged.


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[anes121508]

See if your 401k allows after tax contributions and in service withdrawals. WCI wrote awhile back how to get up to 53k into a roth even if you don't qualify for the income limit. It's not pre-tax money but still tax advantaged.


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Interesting, love WCI. I'll have to search for that blog post. I'll google inservice withdrawals because I'm not sure what you mean by that.

 

[doctalaughs]

Interesting, love WCI. I'll have to search for that blog post. I'll google inservice withdrawals because I'm not sure what you mean by that.

Here's the link:
The Mega Backdoor Roth IRA

I'm now in private practice but I used to do this, and my CPA said it was a totally legit but little-known way for high income W2 employees to hit that 53k tax shelter.


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[Man o War]

We do a back door Roth for both me and my stay at home wife. Accountant says it is totally legit.

 

[anes121508]

We do a back door Roth for both me and my stay at home wife. Accountant says it is totally legit.

Here's the link:
The Mega Backdoor Roth IRA

I'm now in private practice but I used to do this, and my CPA said it was a totally legit but little-known way for high income W2 employees to hit that 53k tax shelter.


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This is awesome. Gracias!!!! Great link.

My plan document says it allows the post tax contributions and allows in service withdrawals...do you remember how you timed this? one lump sum, then an immediate rollover? (Seems like the best tax wise)...Or can you do contributions throughout the year and rollovers throughout the year? ....contributions throughout the year then a rollover seems like u might generate more tax consequence if your investments grow

 

[Man o War]

This is awesome. Gracias!!!! Great link.

My plan document says it allows the post tax contributions and allows in service withdrawals...do you remember how you timed this? one lump sum, then an immediate rollover? (Seems like the best tax wise)...Or can you do contributions throughout the year and rollovers throughout the year? ....contributions throughout the year then a rollover seems like u might generate more tax consequence if your investments grow

I do auto withdraws for my pretax stuff, but a lump sum for the back door Roth and then my financial advisor rolls it over immediately for me. I actually just wrote the check a few weeks ago for 2016.

 

[Ezekiel2517]

Here's the link:
The Mega Backdoor Roth IRA

I'm now in private practice but I used to do this, and my CPA said it was a totally legit but little-known way for high income W2 employees to hit that 53k tax shelter.


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Interesting. Do you simply roll over the after tax portion into the Roth 401k option of your group's plan? Or do you roll over into a separate Roth somewhere else?

 

[doctalaughs]

This is awesome. Gracias!!!! Great link.

My plan document says it allows the post tax contributions and allows in service withdrawals...do you remember how you timed this? one lump sum, then an immediate rollover? (Seems like the best tax wise)...Or can you do contributions throughout the year and rollovers throughout the year? ....contributions throughout the year then a rollover seems like u might generate more tax consequence if your investments grow

I used to do 1 lump sum sometime at the end of the year. Be aware (especially 1st time) it can take some time to figure out how to send the check and how to roll-over from after-tax to roth depending on who administers your plan, so to be safe you may want to shoot for sept-oct instead of December.

Also, this is totally different from the normal backdoor Roth which has a 5500 dollar limit. This is a 53k limit, minus whatever other 401k monies you were able to contribute.

Also read the article carefully because you may have to transfer other funds to the right "buckets" to avoid taxes- ie pro rata rule.


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[doctalaughs]

Interesting. Do you simply roll over the after tax portion into the Roth 401k option of your group's plan? Or do you roll over into a separate Roth somewhere else?

No, you are rolling money completely out of the 401k plan, into a separate roth. As I understand if you roll from after-tax 401k into Roth 401k that has much less tax advantage and often is a wash. I'm not a finance person though so ask your CPA or financial advisor for details.


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[aneftp]

It's just amazing people are banking on Roth post tax.

Though congress (especially obama) faced harsh criticism for evening proposing taxing post tax 529 college savings account. Don't think for a second. Another liberal movement will try to devise ways to extra tax revenue from those post tax Roth IRA in the future.

Proceed with caution.

 

[doctalaughs]

It's just amazing people are banking on Roth post tax.

Though congress (especially obama) faced harsh criticism for evening proposing taxing post tax 529 college savings account. Don't think for a second. Another liberal movement will try to devise ways to extra tax revenue from those post tax Roth IRA in the future.

Proceed with caution.

I suppose; however they could change the laws to do anything though,so nothing is really safe if you look at it that way -401k, capital gains, estate, HSA etc.

I don't know what logic there is behind the Roth being "less" safe as a tax shelter. The Roth is a fairly widely used investment vehicle so there would be a pretty big protest if they penalized it. They could also abolish medicare or social security, but I just don't see it happening due to unpopularity.

I suppose you could hide gold and guns in your mattress but I'm not that paranoid.



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[aneftp]

I suppose; however they could change the laws to do anything though,so nothing is really safe if you look at it that way -401k, capital gains, estate, HSA etc.

I don't know what logic there is behind the Roth being "less" safe as a tax shelter. The Roth is a fairly widely used investment vehicle so there would be a pretty big protest if they penalized it. They could also abolish medicare or social security, but I just don't see it happening due to unpopularity.

I suppose you could hide gold and guns in your mattress but I'm not that paranoid.



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I know. I just wouldn't got "all in" with Roth post tax. They are newer (less than 20 years old). And the backdoor stuff/conversion is only 6-7 years old. Roth post tax isn't unsafe. Just diversified urself.

401k pretax have really only been around widely since the mid 1980s (it was invented in the late 1970s)

So many of those accounts haven't been tapped yet (the 401k pretax). People are just retiring with them these days accounts. It will take another 20 years for those with sizable Roth IRA to start with drawing them.

Individual States are still adjusting how to "tax" pretax 401k. Some states tax them. Some done. Forgot. But I don't think Illinois taxes 401k pretax with draw from pretax 401&

I suspect tax laws will change in the next 10 years as government gets hungrier for tax revenue.

 

[anes121508]

I used to do 1 lump sum sometime at the end of the year. Be aware (especially 1st time) it can take some time to figure out how to send the check and how to roll-over from after-tax to roth depending on who administers your plan, so to be safe you may want to shoot for sept-oct instead of December.

Also, this is totally different from the normal backdoor Roth which has a 5500 dollar limit. This is a 53k limit, minus whatever other 401k monies you were able to contribute.

Also read the article carefully because you may have to transfer other funds to the right "buckets" to avoid taxes- ie pro rata rule.


Sent from my iPhone using SDN mobile

I've read some of the discussions in the WCI website and the site you posted.

It's seems there is some confusion about the tax treatment of the after tax money you have contributed to your 401k when you attempt to send it into a Roth IRA.

Someone commented that if your plan allows for inservice withdrawals of pre or post tax dollars then you are subject to the prorata tax similar to the backdoor Roth conversion. Essentially, the more money you have in the 401k, the more tax you will owe.

Someone then said that if your plan only allows the withdrawals of the post tax money, then you are not subject to paying any additional taxes.

Does anyone know about this?

 

[doctalaughs]

I know. I just wouldn't got "all in" with Roth post tax. They are newer (less than 20 years old). And the backdoor stuff/conversion is only 6-7 years old. Roth post tax isn't unsafe. Just diversified urself.

401k pretax have really only been around widely since the mid 1980s (it was invented in the late 1970s)

So many of those accounts haven't been tapped yet (the 401k pretax). People are just retiring with them these days accounts. It will take another 20 years for those with sizable Roth IRA to start with drawing them.

Individual States are still adjusting how to "tax" pretax 401k. Some states tax them. Some done. Forgot. But I don't think Illinois taxes 401k pretax with draw from pretax 401&

I suspect tax laws will change in the next 10 years as government gets hungrier for tax revenue.

I understand your hesitation. However, I was talking about doing this Roth rollover strategy ONLY after maxing out any pre-tax vehicles available (usually I would get about 30k into pre-tax with my 18k contribution + match, then finish out 20-25k more using this roth backdoor). I still think it's better than putting money into a fully taxable account, which is priority # 3 after funding #1, #2 and any HSA or education fund you have at your disposal.

Basically my prior strategy was
1. Max pre-tax with 401k and any match
2. Fund kids 529s and HSA
3. Max the roth rollover with after-tax contributions
4. Fund taxable accounts.

Also, once you are a business owner this doesn't apply as you probably can setup even more advantageous vehicles, as I have now, to save 75-125k in shelters. However, the above situation may be the only option for a W2 employee (and way better than the paltry 18k that most people do).


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[doctalaughs]

I've read some of the discussions in the WCI website and the site you posted.

It's seems there is some confusion about the tax treatment of the after tax money you have contributed to your 401k when you attempt to send it into a Roth IRA.

Someone commented that if your plan allows for inservice withdrawals of pre or post tax dollars then you are subject to the prorata tax similar to the backdoor Roth conversion. Essentially, the more money you have in the 401k, the more tax you will owe.

Someone then said that if your plan only allows the withdrawals of the post tax money, then you are not subject to paying any additional taxes.

Does anyone know about this?

I agree this area is very confusing and you should talk to a CPA that is used to dealing with high earners (preferably does a lot of doctor returns). Usually you can easily move money to the right "bucket", without any penalty, to avoid pro-rata taxes as I understand.


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[anes121508]

I agree this area is very confusing and you should talk to a CPA that is used to dealing with high earners (preferably does a lot of doctor returns). Usually you can easily move money to the right "bucket", without any penalty, to avoid pro-rata taxes as I understand.


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Any of you guys use an SERP after maxing out traditional tax sheltered vehicles? Reading my employers plan and maybe an additional tax deferred option could be useful, but seems a little risky to put too much money in an account that is subject to creditors that come after the AMC. What do you all think?