Concerned

[disneysteve]

I know how the 401k withdrawal works as of today, but what if the government needed money fast? It could decide to confiscate the tax it is owed immediatly, and under a really desparate situation, all of it(but not likely).

That would be an accounting nightmare. If they decide to take all the tax owed based on the current account value, what would happen with next year's distribution that had gained additional value? Or what if the value had dropped after the taxes got paid but before you actually got to withdraw the money? What a mess that would be.

I think existing accounts are safe but I can certainly see them changing the rules going forward for new accounts, somehow lessening the tax benefits of 401k accounts.

I agree with MonkeyMama that if the government destabilizes to the point that they start grabbing money out of private citizens' retirement accounts, we are going to have far bigger problems to worry about.

[disneysteve]

The other easy thing for them to do is hike the income tax, which I'm quite certain will happen. So instead of taxing those 401k withdrawals at 15% or 25%, tax them at 30% or 40% or more. Remember, the top marginal tax rate today is 35%. 30 years ago it was 70%.

[maat55]

Maat, I don't think they will be able to seize 401ks so quickly. It'll go through courts and take years. Yeah it's a scare tactic i think you're talking about. Very big legal maneuvering.

But increasing the age of SS? Easy peasy.

Decreasing benefits and increasing tax on that? Also easy. Just pass it legislatively.

You can't do that with 401ks and taxing it. You are sort of going over the edge, saying the government is going to get desperate for the taxes from 401k.

That's MINIMAL compared to imagine if they began unlimited taxing of income for SS at 6.5%? Can you even fathom how much more that is? Or doubling the medicare tax????

People haven't saved nearly 20% of what they earn in 401k. So imagine taxing 100% of EARNINGS! Woohoo.

And hitting it with a flat 6.5% or 13% for self employed and 3% for medicare? OMG, the revenues would be like cash growing from trees.

I find it disturbing when people have a liasson faire attitude towards tax increases. I would think that the evidence that the government has grossly mismanaged these programs would have us looking for ways out and not to expand them.

[maat55]

I agree with MonkeyMama that if the government destabilizes to the point that they start grabbing money out of private citizens' retirement accounts, we are going to have far bigger problems to worry about.

I think you both are right on this.

[LivingAlmostLarge]

Maat, it's not going to happen because logistically you can't tax a 401k. Which was your OP. That we're going to lose our 401ks confiscated to pay for SS.

I made actually I think reasonable suggestions for how I think the government might fund SS and Medicare.

Can you say I'm really be laisse faire about it? No.

If anything you're trying to scare monger reasonable and logical people. You're pulling a McCarthyism.

Truth is we will likely have to fund SS and Medicare. Old people are not going to agree to cutting it.

That being said, what are feasible, reasonable options for funding it?

DS's idea of raising income taxes is one. But that will likely go to the national budget already.

Raising SS and Medicare taxes to pay for SS and Medicare would be the most direct and logical solution.

Taxing 401ks? Does not directly, quickly, or logistically work for funding SS and Medicare, which is what you stated in your OP.

Also I don't think it's only the government mismanagement. Rather, what is being shown is that people use a socialized, centralized medical system. And when we had a chance to do it, we didn't go all the way. Instead we ended up with our current system in place that EVERYONE wants reformed.

Second, I also think that people and life has changed. Medicine has allowed us to live FOREVER. Thus we're drawing a lot longer on medicare and SS than was ever predicted or expected. The life expectancy has gone up by 10 years. But the withdrawal age has not.

I also believe that we've shifted so that more people are going to be depending on SS, since people are starting to LACK pensions. Pensions they used to depend on to survive.

Now people don't save for retirement period. Mindset has to change if we wish to change our society.

That being said, I do believe you are scaremongering people about 401ks and SS and Medicare.

How can I not, with your OP? And how is it a feasible and logistic plan to tax 401ks now? How would Larry Burkett do it and implement it?

Tax nightmares.

[getforfree]

I think, they might reduce SS benefits to those who has 401K or any other source of income in the old age. For example if a person suppose to receive 1000/month in SS benefits, he/she might have that amount reduced just because this person has 401k will be forced to withdraw from there every month.

That's why I am not sure if I should even conttibute to my retirement or should I just cash it out while my income is low now, and taxes won't be as much.

I think, SS benefits might become kind of like welfare benefits. If you don't have anything, you will get what you paid for your whole life, but if you happen to have a retirement account, SS benefits might be reduced or you might not be even eligeable.

That's what I think, they might do, and people will be punished for saving their money, again.

[maat55]

LAL, taxing the 401k's is a given. I'm talking about the possiblity of premature confiscation of the owed tax or even the full amounts(the latter not likely).

The ability of the government to continue selling treasuries is growing less likely to fund our debt. Raising taxes enough to make up the difference is questionable without riots. Postponing benefits later is likely, but we have a government that is headed for a wreck and may resort to desparate measures.

On top of this, the government wants to add more programs and debt while closing in on our most liable years with no funding established. The dollar is being devalued, inflation is all but a given in the near future and we are looking at an lost decade scenario for our economy.

If all these things continue, the dollar will collapse, our consumption based economy will worsen, large deficits will continue, foreclosures will skyrocket etc.

Remember, Roosevelt confiscated all the gold during the depression, what makes you think this could not happen again?

[maat55]

I think, they might reduce SS benefits to those who has 401K or any other source of income in the old age. For example if a person suppose to receive 1000/month in SS benefits, he/she might have that amount reduced just because this person has 401k will be forced to withdraw from there every month.

That's why I am not sure if I should even conttibute to my retirement or should I just cash it out while my income is low now, and taxes won't be as much.

I think, SS benefits might become kind of like welfare benefits. If you don't have anything, you will get what you paid for your whole life, but if you happen to have a retirement account, SS benefits might be reduced or you might not be even eligeable.

That's what I think, they might do, and people will be punished for saving their money, again.

It's hard to know what they will do, but Not preparing in some fashion would not be wise. This is why I considered the hard asset option, if not all, at least a % of ones portfolio should be diversified away from paper assets.

[LivingAlmostLarge]

No, it's like saying that we're going to tax Roth IRAs. I don't think it's a given that it will happen. Actually if you read the thread Maat, I believe you are in the minority.

The taxing of 401ks will take a lot of time. There are easier fixes to be had, including raising the age, means based, and raising the taxes on it.

Thus out of all scenarios yours is the least likely.

[cantretire]

I think the SS retirement age is going to go up quite a bit. I don't expect to be able to retire before 70-72. I hope my health holds out.

[am_vanquish]

It's hard to know what they will do, but Not preparing in some fashion would not be wise. This is why I considered the hard asset option, if not all, at least a % of ones portfolio should be diversified away from paper assets.

As others have eluded, a worst-case scenario like the one you're describing will come with many other problems. What makes you think that if the government is SO desperate for money that they will increase taxes (or confiscation) on 401k's without increasing property taxes? In the situation you describe (as improbable as it is), I would think there's no safe place.

Now, as extreme & crazy as I think your scenario sounds, I'll admit that I am concerned about how the government may change tax codes on my Roth IRA. I've already paid taxes on that money at a nice, low rate. If they decide to "double dip" on my Roth account ..... it won't be pretty.

[creditcardfree]

It seems changing the way 401K's are taxed would be political assassination. I really think there are many other options that would be considered and tried before they confiscate your 401K.

[PetMom]

When bad economic times come for govt. they have so much power on their side and the levying ability of getting their money that this is not such a scare monger post.

I agree with this point.

Who would have thought CA. would be paying out IOUs to people, as that state nears economic collapse.

Who, who happens to have over $250,000. yearly income, would have ever thought they would be targeted to pay a much bigger soon to be implemented tax.

Even local govt.s can get in on the act of getting money from their consituents. People in Crandall, Texas, have had their water bill raised from avg. $80.00 to over $400.00 per month. Why? So the local govt. can get their parched coffers refilled.

It is good to watch how people are showing up at town hall meetings to protest/discuss anything they don't like about the proposed healthcare reform - but the people in Crandall went to protest at city hall and nothing has come of that yet. The mayor just meekly said the city really needs the money now and the citizens must help by 'sacrificing' for now.

Some cities are considering or are already doing away with the 2/1 city workers' retirement benefits - making them 1/1 - no one ever thought that could happen or even be considered.

All levels of govt. can get access to money.

When govt. runs out of money and needs more and printing it is not giving them enough they historically have always levied more taxes (obvious or hidden) or lessened benefits or qualifying criteria for benefits.

[Joan.of.the.Arch]

PetMom, what is meant by 2/1 benefits? Is that a retirement benefits scheme commonly used by cities? I've never heard of it.

The water rates increase in that Texas town was a 125% increase according to this article. City Raises Water Rates 125% | NBC Dallas-Fort Worth So sounds like a bill of $80/month would have become $180. I don't know if that would be considered a tax, or a fee for actual use. The article does mention new water meters, so I'm thinking it is a fee for the actual water use....Some places don't get water from government water plants at all, but must buy it from private sources or have one's own well.

To the person who thought their Roth might get taxed even though they have paid tax on the income before it was put into the account--- I think that would be a constitutional issue. Applying a new law to already tax-paid accounts might be considered ex post facto. Ex post facto laws are specifically forbidden by the Constitution.

[LivingAlmostLarge]

Um, CA paying with IOUs is NOTHING new. In the early 1990s, orange county did it because their investments lost money big time. My aunt worked for the county and got paid in IOUs.

http://blogs.reuters.com/commentaries/2009/07/01/californias-ious-may-be-difficult-to-cash-in/

I don't think we've learned much if we're in the same situation.

Retirement benefits for state workers are going down the toilet. Ask my mom, it's called civil servant reform. Every state is doing it.

Going 1/1 from 2/1 is the only way to make it solvent. How else will the pension survive? Can they really pay 2% for every year of service of salary?