SURVEY SAYS: What Do You Think about Changing the Tax Treatment of 401(k)s?

In the past two years, proposals have been made to change the tax treatment of 401(k) contributions either by capping the amount of contributions that can be made to a plan pre-tax or by taxing all contributions and giving participants a refund of a certain amount when they file their taxes.

Those making the proposals say it will provide more money to the government and create jobs and boost the economy. However, analyses by retirement industry groups argue it will hurt retirement savings for American workers.   

Last week, I asked NewsDash readers, how do you feel about changing the tax treatment of 401(k)s?  

Eighty-nine percent of responding NewsDash readers said changing the tax treatment of 401(k)s will hurt Americans’ retirement savings, and 11% said it possibly could.  One respondent said it will not hurt Americans’ retirement savings. The “other” responses were that it depends on how the tax treatment of 401(k)s is changed.  

Two-thirds (66%) of respondents think employees would be discouraged from saving for retirement, and 58% indicated employees would still save, but at a lower amount. (More than one response was allowed.) Forty-one percent said employers would be discouraged from offering retirement plans, and 30% said employers would offer plans, but not contribute to them.  

Only 5% feel employees would not change their behaviors, and only 4% believe employers would not change their behaviors.  

Among “other “ responses, one NewsDash reader said any and all of the above could change, another said it would create more complexity in an already complex tax code and another indicated it may make the Roth 401(k) more attractive.  

The verbatim comments (there were many) were strong, with some saying changing the tax treatment of 401(k)s would be “disastrous,” “a tragedy,” “insane” and “a travesty.” However, one reader said: “Of course, anything that pushes the pendulum back toward DB plans and lifetime income is a plus.” 


The changes put forth thus far seem to assume that low-income workers don't care about tax deferral, and that employers will continue to offer these plans no matter what. Both are bad assumptions. The Gilarducci proposal is basically about dumping everybody's 401(k) into some kind of big socialist pot where the money I dutifully save over a lifetime will go to "others" (many of which will not have dutifully saved over a lifetime). Honestly, I wish some of these academics would get a real job. Or at least spend some time talking to someone who has a real job. 


Makes sense...the current regime is interested in having all of their constituents dependent on them totally for their livelihoods. Thus the ultimate distruction of private health insurance with the first step starting in 2014. Now the ultimate distruction of private retirement plans; first with the onerous requirements on DB plans and their slow but steady demise, and now the reduction in favorable tax treatment of 401k plans. The only income security and replacement at retirement will be through the federal government...what will be lost next, private property owership?...then the right to vote? 


There are already limits in place. Anything which would serve to lower the amount saved would be a negative for the already underfunded retirements of most people. We have no one at this point who takes the current 401 (k) tax credit. 


It's hard enough to get people to take saving for retirement seriously. Take away the current tax benefit and it will get enough tougher. Plus ... they pay a ridiculous amount in ordinary income taxes at retirement. Unless the rules change so that their money gets taxed at long-term capital gains rates when they take it out, I see taxing contributions as a great disincentive. 


This would be one of the worst things Congress coudl do and would cost us much more in the fuutre in welfare benefits. 


So, instead of waiting for the taxes when I retire the government wants to collect it now and give some back at the end of the year? Sounds like the only growth will be in the cost of government! 


Unless a bi-partisan group is able to show definitive proof how the tax changes would benefit the government by decreasing it's debt, this is just another stupid idea put forth by our elected officials. 


On one side, there are views that all eemployers must provide access through payroll deduction and some suggest be required to pay just as in the UK or Australia because we must encourage savinsg, then we want to change the tax rules, seems we should get on the sma epage. 


I think it could be disastrous! So many companies have moved away from DB plans toward a combination of the 401(k) plus some kind of cash contributions into the DC side in the hope it will sustain some decent form of retirement for participants, if they begin chopoping away at the tax benefits from contributing, it will greatly damage the outcome!! Social Security is too unstable, what do folks have, if there is no DB plan, and now the DC side gets hit? STOP this nonsense now! 


Shift from DB to DC plans diminished retirement by placing the burden on the individual, now this... I understand the government needs to drum up revenue, but they should look at their own benefits first. 


Throw d'a bums out and burn their farms! 


Eliminating the tax deferred nature of contributions to 401(k) plans will kill them. Employers will not incur the cost and heartburn of sponsoring a contributory retirement plan if there is not a tax incentive. 


Just like everything else they do, members of the House and Senate, heck, government in general, operate at a disconnect from reality. No tax employer savings. It really is that simple. 


Those with the least money need to be encouraged to save for retirement. I believe a tax credit would achieve this goal best. The wealthy will save one way or another. Tax payer revenue need not be wasted on them. 


We currently don't offer a match and this has been my selling point, I think this may discourage employers from offering unless they offer it to be competitive only. 


Politicians proposing this are short sighted idiots.

Verbatim (cont.)  

Honestly, it depends on how - and for whom - it's changed 


We already face a serious problem with large numbers of people with inadequate savings, so why remove one of the major inducements to saving through a 401k? There are much better ways to reduce the deficit. 


Current 401k and Roth plans are complicated enough; if different tiers of tax treatments are added, I believe some employers will not offer a plan. 


Americans struggle to save under the current tax structure. Changing the tax treatment of 401(k)s will only make it worse. Many workers today are putting off retirement for several years at least. Lessening the tax treatment of 401(k)s will only exacerbate this situation. 


the only jobs that will be created would be public sector, putting more people on the dole 


This will be an unmitigated disaster for the retirement industry, not to mention participants. Most small business plans are sold on the tax shelter concept. If the tax shelter is removed, there will be no incentive for the small business owner to establish a plan. And we know how much rank and file employees save on their own without a 401(k) plan. Zilch. 


Would be the worst move for the average Joe in a long long time. Not overhauling the AMT to punish people whose income is 99% from their salary on the W-2 and the only deductions are RE taxes, W/H taxes, and charity is the next. The AMT was meant for the cheaters not the people above. 


At the end of the day the impact might not be that great because too many Americans aren't participating in their 401(k) plans currently. 


What's next? IRA's? Hey, what about those Roth contributions you're making that are going to be withdrawn tax-free? Ha, ha, ha! Yeah, sure. 


It is another bad idea in a long list of bad ideas. PPA mortally wounded DBs, PPACA is driving up health care costs, greatly increased PBGC premiums will finish off DBs and with the SSA going bankrupt it apparently makes sense to also discourage private retirement saving as well? 


Stupid to mess with the nations number one retirement vehicle to this extent. 


Knowing it is pre-tax is an incentive for our employees. I hope nothing changes. Makes sense to pay tax when you withdraw at a lower tax base. 


It may be bad for our industry, but I think the entire tax code needs an overhaul - even with respect to 401(k) plans. As those of us who work with the tax code each day know, it is far too complicated, inefficient, and riddled with special interests. Wouldn't be nice if all of the great minds working in the employee benefits industry were able to turn their attention to finding a cure for cancer instead of poring over Treasury regulations? 


We've already lost pensions, now the government want to reduce the incentive to save for retirement? With inadequate retirement savings we'll become a nation of people on welfare relying on the government anyway.

Verbatim (cont.)  

We all know that saving for retirement is something that people should do regardless of the tax incentives. Would fewer people buy homes if there were no interest deduction for mortgage payments? Probably fewer could afford to, and there would be fewer who save for retirement. 


Complexity and confussion -- more excuses not to save! 


This idea is a travesty. Theoretically we have these plans so people can accumulate money to take care of themselves in retirement. If you kill the incentive to save, no one will, making everyone once again a burden to society and the government. Meanwhile government takes more of our living (barely) wage to waste on personal greediness prior to needing it to support the burdens they have just created by killing tax incentives for 401(k) savings. Does ANYONE in governent have a brain and analyze the consequences of the idiotic things they propose? 


If a retirement plan does not offer benefit to the business owners, the business owners will find there is little reason to pay the cost for the plans. Regulation has made them more and more expensive to maintain, as well as difficult for highly compensated employees to maximize their own benefit, particularly in small to medium sized companies. 


Contributions are already limited (401g1 limit $17,000 for 2011). Is the discussion to durther reduce this amount? The decision should be to uncap FICA and increase the limits on 401k's and IRA contributions. 


With the reduction of DB plans, the 401k is the primary retirement savings vehicle for Americans. We are not saving enough today to fund our retirements. While this change in the tax treatment may generate an increase in government revenues (we can make the numbers say what we need to in support of our arguements), Americans will continue to find themselves unprepared for our retirements. This proposal does nothing to address the long term issue of the retirement saving crisis we face in this country. 


The government needs to control it's spending - just like everyone else. Lets say this doesn't work and people reduce or stop saving - now you have two problems, the government is still over spending and you have more people that need help down the road. fixing something now and ignoring the future is bad. 


If management believes the value in participating is reduced, their support of the programs will reduce. 


They should leave well enough alone. Anything the government is for is bad for the rest of us. 


Where do I start? 1. The whole idea that the government needs more money is terrible. They can't manage what they've got, and they want more. The people have to put our collective foot down. 2. This whole concept of "equality" is a gross twisting of the American Dream. In America, everyone get equal OPPORTUNITY. The idea that everyone should get equal resources/captial/income is socialist and is not what our country is founded on. The tax incentives are for moderate to upper income people. No amount of tax benefit will give incentive to low income workers that need to put food on the table. The fact that low income workers don't save is not a product of the tax incentives. The fact that moderate income workers do save, is a product of tax incentives. 3. Upper income workers already pay a huge percentage of the taxes. This isn't a question of rich versus not-rich, as the media would portray, but dividing the middle class against itself. The true rich, like Warren Buffet, don't care, but the lower income middle class is being put into the welfare state at cost to only the higher income middle class. That has to end - on both sides. 


Changes would discourage savings for retirement when there is already talk of cutting Social Security benefits. Is that helping anyone but those who do not save.

Verbatim (cont.)  

the federal government has no business taxing 401(k)s when they can't even fund social security benefits for future generations. 


These proposals are yet another way for the government to get more income out of the citizens instead of looking at their expenses and trying to reduce them. If our government would stop worrying about other countries and trying to save everyone else, and instead work on our own state of affairs, they may be able to save some money and help put things back in shape homeside! 


Will undermine the savings habits of those in the lower income levels which will have a broad adverse effect on the ability of this group to retire with government assistance. 


We've worked so hard to teach our employees to save for themselves. We tell them not to count on Social Security. Now we want to make it harder for them to save? Now we want to discourage employers from including profit sharing plans or lowering or eliminating their matching contributions? This makes absolutely no sense. But would be a typical government move. Let's get the money we need in the short term and ignore the long term. 


Just one more way to try to generate dollars for the federal government by hurting the taxpayers, rather than decreasing spending and balancing the budget (what a novel idea). Frustrating!!! 


We should have sent Ted Benna on his way 30 some years ago! Now, in hindsight, we should do the same to these numbskulls! 


It makes me trust the federal government a whole lot less. For 20+ years, I've saved in my 401k with a certain expectation of how the money would be treated from a tax perspective and it feels like they're trying to yank the blanket out from under us. 


Of course, anything that pushes the pendulum back toward DB plans and lifetime income is a plus. 


The government is always looking to hurt the working man! 


very bad idea 


It is a short-sighted, knee-jerk reaction to a drop in tax revenues because of the lagging economy. As idiotic as most everything else that comes out of our government. Sure, let's put up roadblocks to saving for retirement AND sit back and do nothing while the social security system fails. Yeah, that'll work. 


Still trying to figure out how that proposal would create jobs? Must mean more government jobs . . . which does nothing to help boost the economy - just requires the government to come up with more creative ways to generate more tax revenue. 


It ain't broke, don't fix 


The pre-tax and after tax options provide two great options which should be left alone for the participants who are smart enough to use the investments to their advantage. 


If 401(k) contributions become after-tax contributions, I think that behavior will change and savings rates will go lower until people realize that if they don't save for retirement, regardless of whether the contributions are pre-tax or after-tax, there will be no retirement savings. 


The more confusing retirement savings becomes for the average employee, the less likely she/he is to save. Retirement savings is already confusing enough -- how much to save; where to invest the funds; traditional 401(k) or Roth; when to change allocation to more conservative -- are just a few of the concerns retirement savers have now. If you take away the tax reduction incentive, savers may just give up.

Verbatim (cont.)  

it depends on how they are changed, but raising taxes in general will not encourage saving 


It may generate more tax dollars but the government will simply flush them down the toilet. The "rich" will continue to save for retirement while the "average" person will save less. This would lead to said average person being more dependent on the government but maybe that is the ultimate objective? 


Does anybody remember before section 89 when everybody had retirement health care paid for by their employers? If the government starts taxing the retirement, employees will quit participating in it and then employers will quit offering it because no one is participating. No one in government thinks about what will millions of people do with out health care or retirement benefits, they just think about the short term, where to get money. So back to section 89, now that we don't have retirement health benefits covered by employers, the government's costs have gone up for medicare. It was easy to see that one coming. So if the government messes with the retirement plans, how will they come up with more money to cover what people were before paying for themselves? Less government and taxes on retirement and benefits would be better. 


There is already a cap on how much we can contribute (defer is a more correct word) tax-free to a 401(k) plan. If the employer match is not deductible, I expect it would go away entirely. This proposal could crash the entire system. 


If you're looking to enhance revenue, put in a minimum tax for corporations. Balancing the budget or enhancing revenue on the backs of the workers, many of whom have already lost their DB plans and whose retirement savings are less secure due to the economic effects of corporate misconduct and greed is totally misguided. 


This is insane to reduce the incentives for participants to save for retirement especially in light of potential future cuts in social security. Every day I see participants in their 50's with kids moving out on their own, parents are increasing deferral rates to double digits to catchup on savings and now if they are capped and not allowed to catchup, be prepared for a significantly lower standard of living in retirement. 


Surveys have shown that Americans are not saving enough for retirement now; making this change will only make it worse. 


Retirement savings is already low. Higher earners will be restricted and lower earners will be put off by the turmoil. Sad way to generate tax revenue. 


This is NUTS. Rather than taking in more money Uncle Sam needs to learn to spend no more than it is currently taking in. 


It's a hard sell now to get employees to save for their retirement. If taxes are increased or the pre-tax basis is taken away completely, they will just give up and we'll be increasing the future number of poor retirees who will need to rely on the government for their survival,. Maybe that's what the current administration wants. 


This can only have a negative effect, especially in theis "down" economy. We already have the option of using a "Roth" vehicle if we want to do the contributions on an after-tax basis. 


The government, on one hand, complains that taxpayers are not saving enough for a reasonably comfortable retirement, and on the other hand, wants to exacerbate this situation by discouraging savings via retirement plans by taxing them more. Stupidity reigns! 


Are you kidding? First they spend all the money in the Social Security coffers, and now they want to tax us on our efforts to replace the Social Security system with our personal savings. You just can't make this stuff up! 


The government speaks out of both sides of its mouth. It proclaims that it wants to promote increased savings toward retirement, and then atte,pts to limit the amount of those savings by decreasing the tax incentives behind the savings just to increase their tax revenues.