401k 15% Tax On Gains

[Singuy]

With the proposed 15% corporate tax rate, one way to stay revenue neutral is the idea of taxing 401k 15% on the gains and perhaps the dividends as well PRIOR to age 59
.
The thought process is, a 15% corp tax cut will immediately raise the share price, so the 15% should counter this while generate massive amount of revenue.

Not saying this will actually pass...

But lets say it did.

Would you change the way you invest into 401k? Would you take out your 401k despite of penalties and start using taxable accounts to shelter tax free gains?(since you are only taxed if you sell the shares vs this new 401k 15% tax).

I'm not too sure what I'll do, but it seems that 401k will still be the better deal even with the added tax in my tax bracket. I'm not so sure if you are in the 25% tax bracket if it's still worth investing more than the company match.

https://www.fool.com/retirement/2017/04/24/is-donald-trump-about-to-take-away-your-401ks-bigg.aspx

[disneysteve]

I'm confused. Aren't 401k withdrawals already taxed? How would this differ?

[bigdaddybus]

if 401K's were taxed at 15%, I would roll my 401K and wife's 401K into a Roth 401K the first day it was available and pay the taxes.

I see a 0% chance of that happening, but it would be nice.

[Singuy]

I'm confused. Aren't 401k withdrawals already taxed? How would this differ?

This 15% tax is a yearly tax on gains prior to age 59. Also I'm not sure what happens on year when you lose money if the 15% is just on the gains for the year. I can't find anything about them charging tax after 59 or not. I don't think this 15% tax on the gains will convert the 401k into a roth. If so, then I don't think this plan will generate any additional revenue. So far I am thinking withdrawals after 59 are still taxed as ordinary income.

[corn18]

This 15% tax is a yearly tax on gains prior to age 59. Also I'm not sure what happens on year when you lose money if the 15% is just on the gains for the year. I can't find anything about them charging tax after 59 or not. I don't think this 15% tax on the gains will convert the 401k into a roth. If so, then I don't think this plan will generate any additional revenue. So far I am thinking withdrawals after 59 are still taxed as ordinary income.

Would that be the only tax I ever pay on the gains? If so, sign me up. I will likely be in the 25% tax bracket when I retire, so paying 15% now vs. 25% later would be dreamy for me.

Now, if you're talking about 15% now and then tax it again when I withdraw it, no thank you. That would suck. A lot.

[Singuy]

Would that be the only tax I ever pay on the gains? If so, sign me up. I will likely be in the 25% tax bracket when I retire, so paying 15% now vs. 25% later would be dreamy for me.

Now, if you're talking about 15% now and then tax it again when I withdraw it, no thank you. That would suck. A lot.

I think it's the latter. This idea will make the 401k plan worse not better than before. The idea is suppose to generate enough revenue to offset the 20% corp tax reduction. If they decided to not tax you during withdraw, then that's actually a huge tax break for 401k owners..which I don't see that being the case here.

[disneysteve]

I don't know where this idea came from but it would never happen. If 401k plans stop being tax-free growth, people will stop using them. It's a tough call, though, because if you continue to get a 50% company match, you'll still come out ahead vs. investing in a taxable account on your own.

But this is all just hypothetical stuff anyway.

[Singuy]

So a hypothetical equation would look like this.

I put in pre-tax 10k into my 401k. My growth for the year was 10% so 1000.
1000 is subjected to 15% tax which is 150 so my growth ends up being 850 after tax.

vs

I put in POST tax 7k into my 401k(assuming 30% tax bracket), growth was 10%, ends up making 700 that will not be taxed if I don't sell the shares.

Seems like a 401k is still tax efficient on the growth part..but may all be a wash when you withdraw at age 59.

[disneysteve]

So a hypothetical equation would look like this.

I put in pre-tax 10k into my 401k. My growth for the year was 10% so 1000.
1000 is subjected to 15% tax which is 150 so my growth ends up being 850 after tax.

vs

I put in POST tax 7k into my 401k(assuming 30% tax bracket), growth was 10%, ends up making 700 that will not be taxed if I don't sell the shares.

Seems like a 401k is still tax efficient on the growth part..but may all be a wash when you withdraw at age 59.

And that scenario doesn't include any company match. If that 10K contribution represents 10% of your 100K salary and the company matches with another 3% or 3K, the numbers favor the 401k even more.

[phantom]

I can't imagine this actually happening. But, I've got to admit that I dread this as much for the additional tax prep work as the actual money it would cost me. I definitely like tax sheltered accounts as much for the tax simplicity as for the tax savings.

[PeggyHefferon]

I typically don't put any thought into hypothetical scenarios about unpassed tax laws.

[TexasHusker]

I typically don't put any thought into hypothetical scenarios about unpassed tax laws.

+1. And I generally don't make investment decisions based upon tax consequences. Tail wagging dog.

[AJ444]

I predict instead the following will happen:

1. Roth 401ks will become the only option.

2. There will be an early withdrawal penalty holiday to allow folks to convert their existing Traditional Accounts to Roth, and pay the taxes to do so using the accounts.

3. 2 will eventually become mandatory.

4. In 19 years when the gov finds themselves short again they find a way to tax Roth's for a second time, perhaps by moving to a national sales tax instead of an income tax.

[corn18]

Well, Spicer just said that all deductions will go away except the charity and mortgage interest deductions.

[Captain Save]

I don't know where this idea came from but it would never happen. If 401k plans stop being tax-free growth, people will stop using them. It's a tough call, though, because if you continue to get a 50% company match, you'll still come out ahead vs. investing in a taxable account on your own.

But this is all just hypothetical stuff anyway.

I think the match is more of a draw of why people use it... I don't think the average 9-5er will care that much about delaying their tax.. maybe small business owner .. but not the average worker. The match is the draw..

This is purely my opinion.. so if there were something to prove me wrong .. I'd consider it.