There is currently a great deal of discussion about changes in the tax code, a subject which, like almost any government changes in course should never be referred to as reform because from some standpoints it certainly will not be. Case in point is the suggestion now under consideration that the treatment of qualified retirement plans, such as the ubiquitous 401(k), should change to make the plans more akin to the Roth IRA. This would mean that the plan participant – you or me, the taxpayer – would fund their retirement plan with after-tax dollars. That’s right, no more tax deferral.
What is the carrot offered for these retirement savers? A promise that down the road, when distributions are taken from the plan, there will not be any tax due. That suggests tax-free growth and makes one wonder about the required minimum distribution piece of the current qualified retirement plan structure. If there is no tax money to be gained by the government by forcing out distributions, then there is no reason for folks to take that money other than necessity. Sounds like estate planning might change a bit to accommodate these potential changes.
The bigger issue, which should be thoughtfully considered by all of us, is what is really going on. First, the government with its insatiable demand for more and more money, wants those tax dollars NOW and in return makes a hollow promise of no future taxation. Do you really trust the government to stick to that promise when they see significant amounts of growth that they “can’t” tax? Think about it.
Then there is the likely impact of the loss of tax deferral which will lead taxpayers to do other things with their money since they won’t have the benefit of reducing their current taxes. This might be a strong disincentive to many folks and it might create a strong push back on the auto-enrollment programs now in place. Are these intended consequences or is this just another case of lots of hot air without any thought behind it?