New 401(k) tax break is just around the corner

[coyotes_geek]

New 401(k) tax break just around the corner

People with 401(k) plans got a nice tax break last month, but they'll have to wait for some red tape to be cleared out of the way before they can actually take advantage of it.

Thanks to a provision in the Small Business Jobs Act, which President Obama signed into law last month, 401(k) plan participants will be permitted to roll their accounts over into Roth 401(k)s. The change will give many people with defined-contribution plans greater flexibility in paying taxes; while holders of conventional 401(k)s deposit pre-tax dollars into their accounts and pay taxes upon withdrawal, Roth 401(k) holders fund their accounts with after-tax dollars but withdraw the money tax-free. (In both cases, any investment growth within the account comes free of taxes you don't have to pay taxes as your investments grow within your account.)

The new rule, built into the Small Business Jobs Act of 2010, was an unexpected provision included, in part, to generate short-term tax revenue to offset the costs of other tax breaks in the bill, says Kaplan. "The result is that it's caught many people by surprise," he says, "including plan administrators."

I stumbled across this and thought the story has an interesting dynamic to it in terms of personal finance vs. government tax/fiscal policy.

From a personal finance standpoint, this is a great deal for individual investors. The opportunity to pay taxes on $X today and enjoy >$X worth of retirement money tax-free tomorrow isn't one that too many people should be passing up. The ability to have a tax-free source of retirement income makes a great hedge against declining social security income.

From the government's standpoint, this is nothing more than a short-sighted gimmick designed to inflate short term tax revenue at the expense of lost tax revenue on a much larger pool of money down the road when those who convert to Roth's today retire tomorrow.

Of course you don't have to be a genius to figure out what group of people will benefit disproportionally from this. So 20-30 years down the road when people are wondering how that one group continues to be able to carry a lower effective tax rate than everyone else, this will be a large part of the reason why.

Now if you'll pardon me I'm going to go find that conversion paperwork.

[Drachen]

I stumbled across this and thought the story has an interesting dynamic to it in terms of personal finance vs. government tax/fiscal policy.

From a personal finance standpoint, this is a great deal for individual investors. The opportunity to pay taxes on $X today and enjoy >$X worth of retirement money tax-free tomorrow isn't one that too many people should be passing up. The ability to have a tax-free source of retirement income makes a great hedge against declining social security income.

From the government's standpoint, this is nothing more than a short-sighted gimmick designed to inflate short term tax revenue at the expense of lost tax revenue on a much larger pool of money down the road when those who convert to Roth's today retire tomorrow.

Of course you don't have to be a genius to figure out what group of people will benefit disproportionally from this. So 20-30 years down the road when people are wondering how that one group continues to be able to carry a lower effective tax rate than everyone else, this will be a large part of the reason why.

Now if you'll pardon me I'm going to go find that conversion paperwork.

Yes, I will happily take advantage of this and Yes, it is amazingly shortsighted.

Did you find the conversion paperwork?

[George Gervin's Afro]

You guys need to press your Plan Administrators to amend your 401(k) plans to allow this.

[MannyIsGod]

This is the kind of that has no business passing into law.

[coyotes_geek]

Yes, I will happily take advantage of this and Yes, it is amazingly shortsighted.

Did you find the conversion paperwork?

Not yet. Should just be a matter of time though. My 401k just recently started offering a roth option.

[Wild Cobra]

This is the kind of that has no business passing into law.

I agree, but I'll roll a million or so over.