Is Trump Going After Your 401(k)?
Heh… And all along you thought it was Obama who’d confiscate your 401(k). What if it turns out to be Trump?
Tomorrow the president will lay out broad guidelines for what he wants in a “tax reform” package. A few details are already dribbling out. Supposedly he wants to cut the top corporate income tax rate from 35% to 15%, and supposedly he doesn’t care whether that swells the budget deficit.
But that’s today. Less than two weeks ago, he said he wouldn’t lay out any tax ideas at all until Obamacare reform got done first — and it’s not done.
So… with the proviso that we don’t know what the president’s priorities really are from one week to the next… let’s dive into what could be a very real threat facing your 401(k).
To be sure, the term “401(k) confiscation” is an exaggeration. No one, to our knowledge, has proposed the feds outright seize the money in your account. That would be too obvious.
Instead, most of the proposals that have been floated over the years are more stealthy and devious. Your editor has been on top of them ever since the topic first came to light nearly a decade ago, when I wrote about it on The Daily Reckoning a year ago.
It was October 2008. Lehman Bros. had already gone under. The Panic of ’08 was in full swing. The crash had already vaporized $2 trillion from Americans’ 401(k) and pension plans. And the House Education and Labor Committee held a hearing looking into this question: Should “high-income” earners be excluded from making tax-deferred 401(k) contributions?
“With respect to the 401(k), it appears to be a plan that is not really well devised for the changes in the market,” said committee chairman Rep. George Miller (D-California).
Then he revealed what the idea was really about: “We’ve invested $80 billion into subsidizing this activity” — meaning to his mind the government had “lost” $80 billion in revenue it would have collected were it not for this high-income giveaway.
The notion never got out of committee. Congress was too busy at the time passing other awful ideas like the bank bailouts.
But the idea never went away. Similar proposals were kicked around in Washington shortly after Obama’s re-election in 2012.
Last year, The 5 told you how economist Teresa Ghilarducci from The New School university in New York — the star witness at that 2008 hearing — teamed up with Wall Street bigwig Hamilton “Tony” James, president of Blackstone Group. They issued a paper proposing that the tax breaks of a 401(k) be phased out for everyone, no matter their income.
The proposal made a momentary splash… and was quickly forgotten.
But fast-forward a year and there’s serious scuttlebutt in Washington about abolishing the 401(k)’s tax advantages as part of a Trump tax-reform package.
On Saturday, The Wall Street Journal had a heck of a scoop… and it got buried midway through Jason Zweig’s weekly personal finance column. It belonged on the front page, above the fold, in screaming-big font.
“At a meeting with members of the Senate Banking Committee earlier this month, Gary Cohn, the director of the White House National Economic Council, discussed ideas that would remove pretax benefits from retirement accounts including 401(k)s and shift them to after-tax benefits, according to people familiar with the discussions.”
Good ol’ Gary Cohn. “Goldman Gary.” He was president of Goldman Sachs before joining the administration.
Zweig was careful to point out no decisions had been made. But he seems to know which way the political winds are blowing. He quoted a Washington lawyer named Bradford Campbell, who was assistant secretary of labor under Bush the Younger.
When it comes to Trump’s tax reform, “it’s not really a question of whether retirement plans will get a haircut, but of how much,” said Campbell. Tax reform is always “a game of winners and losers, and the retirement system is poised to be one of the losers.”
And by wiping out the tax-deferral benefit of a 401(k) — effectively switching future contributions to a Roth-style plan without your consent — Uncle Sam would collect a $1.5 trillion windfall over the next decade.
But wait — even worse ideas are afoot.
Last year, an outfit called the Tax Policy Center issued its own paper. This group is backed by the center-left Brookings Institution, and one of the paper’s authors hails from the conservative American Enterprise Institute. So beware — it’s got bipartisan support.
Under this proposal, existing 401(k)s would still be available. But — and this is a huge but — the annual gains in your account would be taxed at a 15% rate. That would raise $48 billion in new revenue starting next year — enough, the report’s authors said, to offset at least some of the revenue lost by cutting the corporate income tax to 15%.
Think about this for a minute: Under this proposal, your retirement money might be better off in a taxable account. At least there you don’t pay capital gains tax until you sell!
The authors justify the tax by saying the corporate income tax cut will juice corporate earnings and thus share prices, so a bigger retirement account will offset any piddling tax you’d have to pay.
Yeah, pull the other one…
Bottom line: If Washington really is about to undertake the biggest tax reform since 1986, everything is on the table — including your 401(k).
Retirement pros were sensing this only weeks after Trump’s election. “It is incomprehensible to me that Congress will not go after retirement plans in some way in tax reform,” said Randy Hardock, a partner at the high-powered D.C. law firm Davis & Harman, and a former staffer on the Senate Finance Committee.
Who knows how it might all end? These are just broad-stroke ideas. The details could be even more horrifying: Maybe your existing 401(k) funds would be converted to a Roth and your entire account would become taxable income in a single year. (Now there’d be an instant windfall for Uncle Sam, even if it would be a financial-planning nightmare for you.)
It’s still early days. But we’ll be keeping a wary eye… and anticipating defensive strategies you might want to adopt, depending on what Goldman Gary and his friends are cooking up.