I know Mr. Money Mustache preaches the Low Information Diet. He thinks of the news as a huge timesuck that distracts from the things that really matter in life! And like Morrissey sings, “the news contrives to frighten you.” I like this in theory, but I’ve never been a good adherent of it. I’m pretty much a news junkie. I even have a digital subscription to the New York Times!
MMM says, “you too should be paying absolutely no attention the news.” But I’m here to tell you today that if early retirement is your goal, there is a news story that deserves your attention!
The New York Times reports that Republicans are considering a sharp cut in 401(k) contribution limits. And a sharp cut it is. Right now, you can contribute a maximum of $18,000 per year to your 401(k). Under the new plan, the limit could be as low as $2,400. Yes, that is just over two thousand dollars! Anything over that will be taxed. And the converse is true. Instead of all of that money being taxed later in life upon withdrawl, when you are hopefully in a lower tax bracket, they will be taxed today at your higher rate.
After a very early golden period upon its inception, in 1985 the 401(k) was limited to $7,000 per year. Every year or two, like its cousin the Roth IRA, the limit has increased all the way up to today, where the 2018 limit is planned to be $18,500. This is a massive cut and would accomplish exactly the opposite of what the 401(k) plan was supposed to do: encourage people to save for their retirement.
Everyone uses the 401(k) plan. They don’t use it enough, but everyone uses it. The average worker making less than $30,000 a year contributes 5%. The average worker making over $100,000 contributes just over 8%. So this is not just a tax increase on one group over another. It’s a tax increase on everyone.
Like I’ve pointed out before, 401(k)s can be awful in implementation. They can encourage people to save for retirement on one hand, while stealing their retirement contributions with the other. But they are a godsend in theory. In 1980, 38 percent of people had a workplace pension. Today that is down to 13 percent. Meanwhile, 401(k) participation rates have increased. Defined contribution plans like this allow clever people like us to sock away as much money as possible and retire on our own terms.
Personally, I find this move to gut 401(k)’s be an affront to all that is decent in Ridinkulous land.
The 401(k) plan is a cornerstone of the early retirement movement. Its contributions are not taxed. Your typical early retirement striver is going to be maxing out their 401(k) plan every year, and then cleverly converting that money into a Roth IRA after retirement using a “conversion ladder” so that it’s not penalized upon withdrawl. Using the ladder method, you can keep your savings from being penalized, and even keep yourself in a low tax bracket, but it requires a frugal lifestyle.
The reason this is so offensive to me is because Americans already have the financial decks stacked against them in a way that citizens of other countries do not. They need to find a way to pay for healthcare costs, save for their children’s education (or let them take out massive loans), pay for childcare costs, and also save for their own retirement while navigating the confusing world of investment firms. This would be okay if people were paid enough money to save for all of these things on their own, but we actually have a minimum wage the rest of the developed world laughs at.
The other problem is that the average American gets no financial education to speak of, but does get incredibly easy access to gambling. Why do you think so many people non-sarcastically refer to the lottery as their “retirement fund”?
401(k)s are under-utilized, but that’s not a fault of the plan. That’s a fault of the education. If people think there’s a better chance of retiring by winning the lottery than by socking away small amounts of money every month, that’s a failure of financial literacy. But instead of fixing the problem and help people save, the Republicans are deciding to penalize the average Joe and put retirement further out of reach. They are fine with ditching the estate tax, which only the highest-earning 0.2% of Americans pay, while increasing taxes on the rest of us.
It’s just an awful, ruinous idea. What would be the point of socking away money for retirement at all when that $2,400 a year won’t add up to a hill of beans!
You may have heard that after pulling a choke job on healthcare reform, Republicans (who control the Senate, House, and presidency) are focusing now on tax reform. Tax reform is notoriously difficult to pull off because there are so many stakeholders (literally every person in America) with so many varied interests. So god help us, they just might drop the ball again and not pass anything.
It’s widely known that this raid on your 401(k) plan is a way for Republicans to pay for their corporate tax cut, lower rates for the wealthy, and their wet dream fantasy, abolishment of the estate tax. But I can’t imagine anybody who’s actually in favor of this, Republican or Democrat.
If passed, I would never vote for a Republican again in my lifetime. So, if you have a Republican member of Congress in your district or state, I would be calling them right now. No tax increases on people just because they are responsible enough to save money!