Pension reform bill - higher IRA & 401 K contribution limits favor wealthy

[progree]

Subject: Pension reform bill - higher IRA & 401 K contribution limits favor only the wealthy

I find most progressives do not understand that the higher IRA & 401 K contribution is a provision that exclusively favors only the wealthy, and in a big way. I read that only 8% max out their IRAs and 6% max out their 401 K's (i.e. contribute the maximum allowed). Therefore, increasing these limits only benefits the top 8% or fewer.

Over decades, the tax savings of tax-deferred investing (in traditional IRAs and 401 K's) are huge. So is tax-free investing (in Roth IRAs and Roth 401 K's).

Anyway, the new pension bill that Bush signed today makes permanent the higher savings contribution limits that were set to expire in 2011.

In 2000 the max IRA contribution was only $2,000. Thanks to the 2001 legislation, it is $5,000 in 2008 ($6,000 for those over 50) and these maximums increase with inflation every year thereafter. Had the pension bill not been passed and signed, it would have all reverted back to a $2,000 limit in 2011 and thereafter.

In 2000 the max 401 K contribution was only about $10,000 (sorry, will have to dig for the exact number). Thanks to the 2001 legislation, it is $15,000 in 2006 ($20,000 for those over 50) and these maximums increase with inflation every year thereafter. Had the pension bill not been passed and signed, it would have all reverted back to $10,000 or whatever in 2011.

The bottom line is that the relatively few (fewer than 10%) who benefit from these increased limits will save a bundle on taxes by being allowed to contribute more to these plans.

Unless you are one of those who can (and do) max out both your 401 K and IRA, you are being screwed (you get no benefit from the higher limits, while the wealthy do).

This is something that is not being reported in most mainstream media discussions of the pension reform bill. Oh, they cover it in just one of many single-sentence bullet point items, but they don't say what it really means -- a big tax cut for the wealthy.

[Freedom_from_Chains]

1. Americans never have been big savers, but they need to learn,

but to say this favors the wealthy is just absurd.

[MysteryToMyself]

3. It is that first million that is hard to earn

They recommend people invest 10 percent of their earnings in a 401k each year. If you earn $50,000, that would be $5,000 before taxes. If you are in the 10% bracket, you will save $500 on your taxes. If you average 7% earnings on that $500 savings then you will earn $35 on the $500. When you draw out the $500 you saved on taxes for 1 year plus the $35 you earned on it, then he has gained $535. In 10 years he will have $5,350 tax savings and earnings. In 50 years $26,750

If he contributes more than that he will be have to be very saving and have his home paid for.

Compare that to the man who earns $200,000 or more who invests 10%, and can contribute $20,000. If he is in the 15% tax bracket he saves $3,000 on his taxes. If he earns 7% average each year on the $3,000 tax savings, he will earn $210. Add the $3,000 he saves on taxes that one year, plus the $210 he earns on it for 1 year he will save $3,210.
That is just figuring tax savings on his 401k contributions for one year. multiply it by 10 years and is $32,100. In 50 years it will be $160,500.
The worker who earns $50,000 will gain $26,750
The worker who earns $200,000 will gain $160,500 , 6 times the money the $50,000 worker earns.

This isn't exactly right because it doesn't allow for fund costs and compounding...and you won't earn money for 50 years on any but the first year, the last year you will only earn for one year, but you are also earning money on each years tax saving up until then. And at a certain wage you can't contribute to the an IRA tax free and so it may be only $14,000 tax free except those who are near retirement. I don't have time to look it up, so maybe some one else will or I will later. I am editing this because I accidently posted it before it was ready.

The worst thing about the bill is it is letting the Corporations delay refunding their pension plans. Some experts predict that in 12 to 17 years it they will end up making the taxpayer pay back those pensions.
That is when Social Security will need to be paid back to take care of the boomers and Boomers will be needing their medicare shored up. So we will have to take cuts.

Here is an article about how it different groups see the bill and how it affects them.

http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7B7FDE872C-BA5C-4EF1-B4F2-9C1A192CB74A%7D&keyword=&print=true&dist=printTop

Excerpt

Greed driving new 401(k) rules
Pension-reform conflicts play like Japanese Kabuki and 'Rashomon'
By Paul B. Farrell, MarketWatch
Last Update: 7:33 PM ET Aug 14, 2006

Meanwhile, corporations love the new law. It lets them off the hook, giving them 10 to 17 years to get fully funded. A cruel joke. As a Journal editorial put it, Congress is just putting off "the day of taxpayer reckoning." Once again our do-nothing Congress is avoiding responsibility, downstreaming the inevitable taxpayer bailout of America's entire retirement system: Social Security, Medicare, now corporate pensions.

[progree]

5. Only the wealthy can benefit from the INCREASED contribution limit

The old IRA maximum limit was $2,000 and the old 401 (K) limit was $10,000. Meaning that under the old limits (and the limits that would have come into effect again in 2011 if this new Pension bill had not become law) a person could put aside $12,000 / year every year in long-term tax-advantaged savings.

To benefit from the increased contribution limits that this bill made permanent, one would have to be able to save MORE than that.

I'm not saying only the wealthy benefit from IRAs and 401 (K)'s. I'm saying only the wealthy benefit from an INCREASE in the limit above $12,000.

(The combined IRA and 401 K limit in 2006 for example is 19,000 for those under 50 and 25,000 for those over 50)

Being able to save $12,000 / year every year in long-term savings might not be "wealthy" but is definitely upper upper middle class. Considering that many have to do intermediate savings for e.g. college expenses for kids.



>>Freedom_from_Chains (1000+ posts) Fri Aug-18-06 04:29 AM
1. Americans never have been big savers, but they need to learn,
but to say this favors the wealthy is just absurd.
So long and thanks for all the fish. <<

[thecrow]

2. I'm not rich but I use the IRA and pay it fully each year

it makes sense to save what I can;
it will not be much, but it's something.

[MysteryToMyself]

4. We are saving as much as we can but can't max out the 401k

The point is that those who make less get less benefit, but it is a benefit for all that take advantage of it.

We will have to pay regular taxes on every penny we draw out of the 401k because it is all tax deferred. We don't get the 15% capital gains rate and if we lose half of it investing, that isn't deductible like most investment losses are.

The reform bill was 2 inches thick. No telling what else is in it.

[progree]

6. The Roth 401 K - no taxes on withdrawal.

>> The point is that those who make less get less benefit, but it is a benefit for all that take advantage of it. <<

Agreed on both points.

Many if not most people can and should be contributing something to one or both of these retirement accounts. Probably the 401 K up to the employer's match. Probably the 401 K even after that because you can borrow from it if you really have to (CAUTION!). After maxing out the 401 K ($15,000 in 2006 for those under age 50, $20,000 above 50), then one should contribute to an IRA.

My point is that only the wealthy, or upper middle class, say top 10%, can take advantage of the *INCREASED* CONTRIBUTION LIMIT ABOVE $12,000 combined IRA and 401 K. (Had the Pension Bill not become law, in 2011 and after the combined IRA and 401 K limit would have reverted to the old $12,000 of the pre-BushII era law).

That is, only about the top 10% or so can afford to put away MORE THAN $12,000 LONG-TERM year after year, and thus only they benefit from the INCREASED contribution limit.

(Saving for college or savings for a home purchase is not long-term savings. IRAs and 401 K's are not the place for these kinds of savings because you pay taxes and 10% penalty (under age 59 1/2) if you withdraw from them. Well, 401 K's have a borrowing provision, and maybe it works out to use them for intermediate savings, I don't know).

>>We will have to pay regular taxes on every penny we draw out of the 401k because it is all tax deferred. We don't get the 15% capital gains rate and if we lose half of it investing, that isn't deductible like most investment losses are.<<

Well, there's the ROTH 401 K now which this Pension Bill made permanent (before now it was a new thing that came into being at the beginning of 2006 and sunsetted at the end of 2010). The Roth 401 K is tax-free on withdrawal. (On the other hand, like a Roth IRA, contributions to a Roth are after-tax dollars, i.e. no up front tax-deduction).

But anyway, progressives should not kid themselves into thinking that tax provisions where say 90% of the benefit goes to the top 10% is progressive, just because most people get a few extra crumbs out of it. Crumbs that, by the way we will have to pay back when it comes time to truly finance the boomers' retirement (and not just manufacture bonds out of thin air and stick it into a Social Security "trust-us" fund. Bonds that are nothing more than DOOK-T-PU's -- Demands On Our Kids To Pay Up. (And not just our kids -- most of us too)).

[MysteryToMyself]

9. We shouldn't have to pay Social Security back if we have paid it in

They could lift the ceiling on what Social Security is paid on. Maybe have a gap, then start it at $500,000 earners. They could also dedicate the taxes the Baby Boomers will pay in when they withdraw from their 401ks. They are pushing that we should take out 4 to 5% a year, so it would be drawn out gradually at the very time the boomers need to draw Social Security. Most will probably take the most out the first year, but then can leave it in until they are 70, but even then they can roll it into an IRA for longer, I think.

Another thing they could do is surtax those who earn more than the Social Security ceiling on income taxes. Like if you are working and earning 120,000 then subtract the ceiling, then surtax the rest, which would have $28,000 taxed. That way those who make the least wouldn't have to be strained. The estate tax would have taken care of a lot of the shortfall, but I doubt they will let us have that tax. If it is spread out like that, then the tax rate could be very low, like a half of a percent and it wouldn't be so hard on anyone and our children would be protected.

Three are paying in now. It will go down to two paying in, maybe. That is why we have been paying in extra since 1983, so we wouldn't be a burden when we retire to the younger generation. There are a lot of new immigrants that are paying in. They raise the ceiling of the amount we pay on each year. I think it is at $92,000 that we quit having to pay on it.

They have been proven wrong about people living longer. Statistics say that we are dying younger, but the Bushites say it is a fluke.

Our bonds are not marketable, meaning they can't be sold. FDR did that so they couldn't be defaulted on. He mandated that we can only put it in US Treasury bonds because they the are safest in the world. (he didn't know the Bushites! Well actually he did, people like them fought Social Security tooth and nail. That is why he tried to make it indestructible.)

If nothing else, the gov can borrow the money to pay off the bonds as the boomers need them. Why not? They borrow for everything else.

[mascale]

7. Suffering The Ravages Of Paper Reform

Anyone familiar with the Emancipation Proclamation knows that paper reform is often not well thought through and is generally flawed. In the Emancipation Procalamtion, the Republicans enjoined the newly freed, only when allowed, to work for a living wage. Otherwise there became the famous Amendment 13, and its provision for slave labor, (on which, of course, The Civil Rights of Amendment XIV clearly rely).

In savings, investments, Cost-of-Living Adjustments, and pay raises across-the-board generally: Incomes tend to be increased a fixed percentage.

Now just hold that thought. Clearly the rich get a better shake than all the successively lower incomes. Even famous Senator Joe Lieberman isn't about to give up on that perk all that easily. It is public policy and is law. If you have no money to start with, you are certainly not going to end up with any money.

That is the Law.

Just like the blacks were made "free" under the Emancipation Proclamation. All teachers even peddle that last failure of policy misunderstanding in schools.

And mostly, teachers do not have Ph.d. degrees. So little kids get the lesser qualified teachers instead. And clearly policy happens.

That's the law.

And little kids even know that the law is not just an ass, but is actually run by a lot of: And then, of course, the Lieberman campaign is properly understood.

[MysteryToMyself]

10. That is like the family leave act

Only the higher earners can afford to take off if a family member needs them, so it really didn't help the lower earners.

[MysteryToMyself]

14. I think Taxpayers match Lieberman's TSP Contributions

The taxpayer matches part of the Elected's TSP investments, because they work for us. The government takes care of the paperwork, also.

They have a different plan than we do. Thrift Savings Plan. The government isn't allowed to use it to pay the bills. They have a law prohibiting it. Wouldn't it be nice if they would do that for the rest of us?

Actually, it isn't bad to loan them the money, we earn a billion or so a year in interest each year, which would shore up Social Security. Guess what? They pay the interest with US treasury bonds. The same ones that Bush says are worthless pieces of paper.

Some government workers do pay Social Security, but I don't know the details.:crazy:

[FILAM23]

8. Not really

considering the top 8% exceed the income limits to contribute
the original post is pure BS

[MysteryToMyself]

11. I don't know what the limits are

but even if the next 20% can contribute, it is a bill that helps the well to do.

A $50,000 to $60,000 earner was having a hard time meeting the maximum before it was raised. So it wasn't for them. Get the picture?

[MysteryToMyself]

12. One of Progee's posts on here explains it much better

I shouldn't start answering from the bottom. I thought I had read the ones above.

[MysteryToMyself]

13. It also helps Wallstreet because they can earn more fees

:kick:

[progree]

15. Why max contribution cap increases are regressive. + Marie Antoinette Dems

(The top half of this message tries again to explain why the increase in the maximum contribution caps of IRAs and 401Ks is regressive, i.e. mind-numbing wonky wonk stuff. But something people should try to understand before dismissing it as "pure BS" or "just absurd". The bottom half of this message is about the Marie Antoinettes of the Democratic Party and growing inequality).

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Progree writes Aug-18-06 03:55 AM (Original message)

> Pension reform bill - higher IRA & 401 K contribution limits favor wealthy
(etc. etc.) <

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FILAM23 writes Sun Aug-20-06 10:17 AM

>>8. Not really considering the top 8% exceed the income limits to contribute the original post is pure BS <<

ProudNavyRetiree
-----------------------------------------------

Tsk, Tsk.

Anyway, I hope my message Sun Aug-20-06 12:19 AM:

"5. Only the wealthy can benefit from the INCREASED contribution limit"
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x21813#21821

explains it better than my original post.

But to clarify one point -- anyone no matter how rich, or poor (as long as they have some earned income), can contribute to an IRA and a 401 K. There are no maximum income limits to qualify to contribute to an IRA or 401 K as you might? be thinking. Whether you make $5,000 or $5,000,000,000,000, you are eligible to contribute.

(Exception -- there are income limits for contrbuting to *ROTH* IRAs. But there are no income limits to contributing to Traditional IRAs or Traditional (non-Roth) 401 K's.)

Other than the Roth cap, the only cap is a MAXIMUM amount one can CONTRIBUTE to these plans. (I.E. NOT an INCOME limit but rather a CONTRIBUTION limit).

Under the old pre-Bush tax law, and the one that we would have reverted back to in 2011 -- had Bush not signed this foul "Pension Protection Act (PPA)" bill -- the combined cap on IRA and 401 K contributions would be $12,000 in 2011.

But because Bush signed the bill, the combined IRA and 401 K cap will be $22,900 ($29,700 over age 50) in 2011. (Assuming 3% inflation from now until 2011).

People who are unable to put aside more than $12,000 / year long-term do not benefit from this increase in the contribution cap. If Joe Average can't come up with $12,000 to contribute, how is increasing the contribution limit to $22,900 going to help him? It won't.

But if Richie Rich can contribute tens of thousands of dollars, than the increase in the contribution limit from $12,000 to $22,900 is something he is able to, and likely will, take advantage of and pay lower taxes as a result.

If you don't understand this, please read the above four paragraphs again and think about it until you do. Rather than firing off a "pure BS" response for something you don't understand. Or do some research or ask people who understand taxes and finances.

People who are able to put aside $12,000 / year or more, maybe 10% of us, maybe 1/3 of us if we really really try, will benefit from this increase in the contribution cap.

Its just class warfare by the rich and upper middle class (and maybe even the middle middle class) on the bottom 2/3 or so of us. And what is really troubling is that fancy-pants elitists Marie Antoinette Democrats are part of the problem.

For those of you who think its great that the top 10% or top 1/3 are getting an additional tax break while the bottom 90% of 2/3 or whatever are not, I ask you, how much inequality is enough? Can you tell me what the target level of inequality we should be aiming for? This bill clearly increases inequality by giving a tax break to the top 10% and nothing to the rest.

(And no, it probably doesn't increase savings. No research that I know of on IRAs or 401 K's indicate they increase savings -- rather they shift savings from taxable accounts to these tax-deferred accounts).

Whatever higher level of inequality the Marie Antoinettes of the Democratic Party are looking for, we are well on our way, according to Mortimer Zuckerman in US News and World Report November 18, 2002:

"Average annual salaries in America, adjusted for inflation, have grown only 10% from 1970 to 1999, while after-tax income for the top 1% rose by 157%. The bulk of all income gains were concentrated in the top 20%."

Unfortunately, I haven't been able to find an update for this statistic. But I understand the top 1% fell during the recession / slowdown of 2001-2003 and now is rapidly rising again. Anyway, the updated picture would not be qualitatively different.

Who is Marie Antoinette? She is the French Queen, who, upon hearing that the peasants had no bread and were starving, said, "well, then, let them eat cake!"

Who are the Marie Antoinettes of the Democratic Party? These are the pseudo-progressives fancy-pants elitists who say,

"what, the bottom 90% don't benefit from a tax change that benefits only those who save more than $12,000 per year long term? Well, let them save more!"

Not to mention that there are several other tax-deferral (and even tax-free) programs that have begun or grown under Bush such as educational savings accounts and health savings accounts (the latter is like the best features of the traditional IRA and Roth -- in effect a tax deduction on contributions, and then tax free on withdrawal including tax-free earnings).

So its not just increased caps on 401 K's and IRA's were talking about, its the increased caps on all these other plans as well. So probably Richie Rich can put aside as much as $40,000 ? tax deferred (some of that taxfree) in all these programs combined. While the bottom 90% who can't even max out their 401 K and IRA don't really benefit from these new programs at all -- because any contributions these "bottom 90-percenters" make to these new programs must come out of contributions they would have otherwise made to their 401 K and IRA.

All of this along with the lower (15% maximum) tax on dividends and capital gains for amounts one can't defer in some form of retirement account means we're getting to a much lower level of taxes on capital than on labor.

Again, how much inequality should we try to achieve? How much of a birth tax should we pass on to the unborn? Are you at all aware that ALL projections out beyond 2030 are a fiscal disaster, e.g. last year the GAO forecast that by 2040 all federal revenues would be absorbed simply paying interest on the national debt? And this wasn't some "outlying" forecast. I have not seen a forecast that is qualitatively any different.

No, no, greed is not good. No, no, greed is not right. Greed does not work. Greed is leading us straight to a fiscal disaster.

Its time true progressives learned about what the Repugs are doing with the tax code. And those that think greed is good should get the hell out of DU and go over to "Free" Republic or TownHall.com or some-such. Adios.

Progree