re: What If We Ended 401(k) Tax Breaks to Save Social Security?

quote:

---

Are they? With the current maxes it really doesn’t move the needle much at all if you have any normal deductions

---

If you're a business owner or self employed, don't forget the the max total Contribution is ~66k. If you're in one of the higher marginal brackets, you are saving 35-37% on federal tax for those.
contributions. A fair chunk of change imo.

Hopefully on withdrawal, you'd expect to be in a lower tax bracket. But if I'm withdrawing enough income in my retirement to still be within the 35-37% tax bracket, then I must've done something right or won the lottery

quote:

---

Don’t you end up having to pay taxes on 401k dollars, though?

Traditional: Forego the taxation now and pay when you withdraw.

Roth: Pay taxes now to not have to worry about it when you withdraw.

If that is all correct, then where’s the tax break?

---

Say you don't put it in a 401(k), you just take $500 out of your paycheck and invest it.

That $500 is taxed at your ordinary income rate when you earn it, then it's taxed again at capital gains rate when you sell the investment.

Putting it in your 401(k)/Roth, it's only taxed once.

quote:

---

To be fair, pre tax 401ks are more and more attractive the higher your income is.

---

I agree with this.

quote:

---

Are they? With the current maxes it really doesn’t move the needle much at all if you have any normal deductions. I quit contributing to a pretax 401k years ago and put everything in a work sponsored Roth under the theory that taxes are going to be much higher in 10 years when I can finally touch the money.

---

For our family 401k contributions lower our income tax burden because it lowers the net pay. Sure we will be taxed on it as income coming out, but by then we won’t have the salaries we have now.
I always thought the advantage of the Roth is you don’t pay the taxes on gains within the account ever. I’d prefer to contribute to a Roth over a traditional IRA but we found that once our income prevented us from contributing to a Roth the traditional IRA became more important.

I feel like I must be missing something.

If we tax 401(k) contributions, then no one would use that account. They would simply put their retirement savings into an after-tax investment account. They would pay tax at qualified rates over the years on capital gains and dividends.

I don't see the government getting more money overall by doing this. I do see them getting the money earlier... but at the expense of not getting the money later.

It's kind of like why the government is ok with Roth Conversions... they are losing out on money tomorrow, but getting money today.

You and the government are in a perfectly inverse relationship when it comes to taxation. You win, they lose, They win, you lose.

Don't believe the trickle down argument, it's bogus.

IF the money actually flowed into SS trust fund, then at best you are shoring up SS at the expense of future non-SS budgets.

This is not the answer.

if you wanna kill the dowjones / fortune 100 sure

quote:

---

Run the math on what? Are you saying you can only save for retirement in a tax advantaged account if you make a certain amount of money?

---

No

I'm saying higher income people are much more capable of maxing their 401Ks and realizing more of a tax benefit

And depending on income levels the taxes saved would be in higher brackets

To make it simple let's just look at single filers for 2024

quote:

---

35% for incomes over $243,725 ($487,450 for married couples filing jointly)
32% for incomes over $191,950 ($383,900 for married couples filing jointly)
24% for incomes over $100,525 ($201,050 for married couples filing jointly)
22% for incomes over $47,150 ($94,300 for married couples filing jointly)
12% for incomes over $11,600 ($23,200 for married couples filing jointly)

---

Person A makes 200K and easily hits the $23K tax advantaged limit for 2024 by contributing 11.5% of their salary. $8150 of that would have otherwise been taxed at 32% with the remaining $14,850 at 24%

This comes to a total tax savings of (8150)*.32+(14850)*.24 for a total of $6172 which as a side note is almost enough to fund an IRA for the year.

Person B makes $100K a year and can only afford to contribute 13% or 13K. All of those tax savings come at the 24% rate for a tax savings of 3120 a year.

So you might be saying what if person B contributed the full tax advantaged amount. Sure so that's 23,000*.24 which is 5520 which is still 652 less.

Take the income to a higher level for person C that makes 250K a year and they could very easily hit the 23K max at 9.2%. 100% of the tax savings for that person would be in the 32% bracket which comes out to 7360 a year

It's not difficult to see that higher income individuals can save more on taxes if you look at things practically

quote:

---

To be fair, pre tax 401ks are more and more attractive the higher your income is.

---

This is especially true with an employer match/profit share contribution. For me, that match is the tipping point that keeps me at my current job.

"tax-preferred retirement accounts don't boost overall household savings, they write."
This makes no sense

quote:

---

This is especially true with an employer match/profit share contribution. For me, that match is the tipping point that keeps me at my current job.

---

Agreed. I don't have the greatest match, but it definitely helps.