Hold on to your IRA

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According to a U.S. government report, the Social Security “trust fund” will run out of cash in 2033, three years earlier than the most recent forecast. Anyone paying attention to this demise understands the importance of saving for his or her own retirement. Most Americans include an individual retirement account (IRA) or 401(k) a part of their savings strategy because 401(k)s allow workers to defer the taxability of what they earn today until they take it as income during retirement years. But with $16+ trillion of government debt, some in Washington are looking at the $18 trillion currently sitting in IRAs as part of the fix.

At least two plans are under consideration, one which calls for a reduction in the amount of annual contributions exempt from current taxation from $50,000 to $20,000. The other ends deferred taxation altogether in exchange for an 18% tax credit placed in the retirement account. Washington wants the tax revenue now, and reports suggest that this type of change would increase government revenue by as much as $458 billion annually. Additional details are available at: www.nypost.com/p/news/business/plunder_CrD9s6MElVsEIJj2IVgHuK.

There are many problems with this proposal. First, if the federal government is going to tax income, then it seems reasonable that Americans should be able to defer income from working years to non-working years. The current 401(k) allows you to do that, at least to some extent.

Second, anyone who thinks that the 18% tax credit given will actually survive future attacks on “the rich” is fooling himself. Future leftists will refer to this as another loophole to be closed because wealthy retirees (i.e., those who lived frugally and saved during their working years) just don’t need it.

Third, disallowing Americans to defer taxation on retirement contributions is a disincentive to saving. This means less capital available for business expansion today and lower personal income levels in the future.

Finally–and most importantly–this type of proposal targets REVENUES as the problem when SPENDING is the real issue. Every dollar Washington SPENDS is a tax; it must come from taxpayers today, taxpayers tomorrow if it is borrowed, or all of us if it is financed by printing more currency. Our federal government has a spending problem. Tax overhaul is necessary, but not the core problem.

9 Comments

9 Comments

  1. G  •  Apr 24, 2012 @1:38 PM

    Parnell-you say you want a simple tax system. isn’t it simpler to end the deductions?

  2. John Parnell  •  Apr 24, 2012 @1:46 PM

    G:–Yes and no. (1) If you end the 401(k) deduction, then you should cut the tax rates overall to make up the differences. The tax rates are artificially high to balance deductions like this one. This proposal only ends the deduction, so it just raises taxes. (2) A retirement plan DEFERS INCOME from productive years to nonproductive (retirement) years. This is a rational deduction because the income is not taken until a future point and it is taxed at that time.

    BTW, a fair tax (a tax on sales ONLY and NOT income) would make this discussion irrelevant. Even with a very simple flat tax, this is one of the few reasonable deductions that should survive. Charitable deductions is another because you are really assigning your income to another party (the charity).

  3. Arthur W.  •  Apr 24, 2012 @9:38 PM

    I know this site is about freedom, but a consumption tax has no chance. We have 535 members of Congress who only talk to each other via the TV. They couldn’t even change the taxes when they had a super majority. We need someone to tell us the truth and we need to face it.

    The truth about the 401k push is that they (the U.S. govt) have run out of money from social security and other sources. The trust fund is now upside down and they can’t borrow from it any longer. What’s more, they have to fund retirees, ostensibly through borrowing from the Chinese. Meanwhile, what does Congress do? Cut the social security tax base by $110 bil per year. Medicare premiums and FICA are now covering only about 1/2 of the costs. And we’re getting older.

    I’m not a rat but I know a sinking ship when I see one. This one is way off course and headed for an iceburg at the rate of about $1 trillion per year. We have no tax base where half don’t pay, and an aging population to boot. And all we get is lip service about taxing the rich and now retirement funds. We need some practical ideas and we need them quick.

  4. BT  •  Apr 25, 2012 @7:21 AM

    Hey Arthur, I agree that a consumption tax system is a long shot in Congress unless they add it to income, which would be even worse, but it’s the best system. A simple flat tax system could be good also and could pass with the right leadership.

  5. Arthur W.  •  Apr 25, 2012 @10:14 AM

    Some consumption tax problems. (1) Municipalities no longer issue tax-exempl obligations, not something they want to hear. (2) Churches get a double hit. Donations drop because the deduction is gone and they must pay a consumption tax on a new sanctuary. (3) School districts pay a tax on new construction and (4) the half who don’t pay income taxes now pay a new tax that stares them down everyday.
    Flatter, fewer preferences, broaden the base. Leave Social Security alone.

  6. Mike Evans  •  Apr 26, 2012 @4:33 PM

    Some problems with your consumption tax problems. (1) There is no need for a tax-exempt security under a consumption tax. Tax-exempt anything is a way to attract investment by mitigating crushing penalties on liquidating private property. Municipalities would have to find ways to compete outside of K-Street. (2) There should be no reason churches couldn’t afford to pay a consumption tax as it would not raise the price of goods sold or construction. The FairTax is estimated to increase prices by 1% or less. It’s absolute garbage to pretend that people donate for a tax ddeduction. I would argue that as people get to keep more of their private property, there would be more donations, not less. Have you ever deducted charitable giving? It’s not that big of a break… (3) Good. (4) Again, bogus. With price remaining constant, more money in their pocket, and the prebate, this argument is false.

  7. John Parnell  •  Apr 26, 2012 @6:53 PM

    Both a flat tax and a fair tax have merit, but neither system would be perfect. I prefer a national sales tax (“fair tax”) over a flat tax because it only kicks in when you consume; what you do with your money in terms of investments, savings, etc. is your own business. Moreover, most debates about tax deductions become moot without an income tax. BUT there are questions about the Constitutionality of a national sales tax and I’m VERY NERVOUS about ADDING a new form of taxation without completely killing an existing one. This was the big problem with Herman Cain’s 9-9-9 proposal. POLITICALLY SPEAKING, a flat tax with a sizable personal exemption and deductions for retirement contributions, charitable contributions, mortgage interest, and healthcare expenditures would be a big step forward and might be as far as we can get in a single piece of legislation. Mortgage and healthcare deductions are mere subsidies and we’d be better off scrapping them in favor of a lower tax rate, but I don’t think we will have a majority in Congress willing to send a flat tax bill without these deductions to the President’s desk anytime soon. Obama would never support such a proposal anyway and Romney is anyone’s guess.

  8. Thomas R  •  Apr 27, 2012 @7:36 AM

    It’s smiple- unite behind a flat tax now and maybe the fair tax later

  9. David Gray  •  Apr 28, 2012 @9:27 AM

    Fair and flat taxes make the most sense, but that’s not what congress is interested in. They really don’t want to solve the problem because if they do then there isn’t a reason to convince you that someone else is to blame (i.e., the rich, Wall Street, bankers, etc.) for your lot in life, and then, by extension, the most obvious course of action is to re-elect them so they can “fix” the problem.
    Colorado has a flat tax, and it was the easiest tax filing I ever did. South Dakota has no state income tax, and they are completely solvent, their roads are flawless, the schools good and quality of life is high. Why shouldn’t we follow those models?