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The tax advantage of a 401(k) depends on four factors, all of which have changed dramatically since 1980 – all to the detriment of 401(k)s https://trib.al/KkR1JwD
For a median-income married couple with two children:
Marginal federal income tax rate
43% in 1980, 12% today
Capital gains tax rate
28% in 1980, 0% today
Retirement bracket tax rate
~15% in 1980, 12% today
Interest rates
~15% in 1980, 0% today
https://trib.al/KkR1JwD
Marginal federal income tax rate
43% in 1980, 12% todayCapital gains tax rate
28% in 1980, 0% todayRetirement bracket tax rate
~15% in 1980, 12% todayInterest rates
~15% in 1980, 0% todayhttps://trib.al/KkR1JwD
For a worker with 30 years to retirement, the 1980 version yields an extra investment return of around 9.2% per year.
Using today’s numbers, the benefit comes out to 0.6%, considerably less than the 1% to 2% in fees investors pay in typical 401(k) plans http://trib.al/KkR1JwD
Using today’s numbers, the benefit comes out to 0.6%, considerably less than the 1% to 2% in fees investors pay in typical 401(k) plans http://trib.al/KkR1JwD
That example compares investments paying ordinary income tax rates yearly.
But investors can also use tax-efficient investments. In the 1980s, the 401(k) plan had a 2.5% annual advantage over tax-efficient investments. In 2020, it's non-existent http://trib.al/KkR1JwD
But investors can also use tax-efficient investments. In the 1980s, the 401(k) plan had a 2.5% annual advantage over tax-efficient investments. In 2020, it's non-existent http://trib.al/KkR1JwD
So in 1980, the government offered a huge tax savings, while today it offers little benefit.
Employer contribution remains valuable, with a 100% match worth 2.3% per year in extra return over 30 years, but this has nothing to do with the 401(k) structure http://trib.al/KkR1JwD
Employer contribution remains valuable, with a 100% match worth 2.3% per year in extra return over 30 years, but this has nothing to do with the 401(k) structure http://trib.al/KkR1JwD
Another big change since 1980 is the availability of zero-cost, tax-efficient, well-diversified index funds in convenient form for retail investors http://trib.al/KkR1JwD
Sure, 401(k) plans have reduced costs as well, but to a much smaller degree.
In 1980, a typical investor might have paid 3.5% of assets in fees either in or out of a 401(k). In 2020, that’s shrunk to perhaps 1.5% in a typical 401(k), and 0.5% outside http://trib.al/KkR1JwD
In 1980, a typical investor might have paid 3.5% of assets in fees either in or out of a 401(k). In 2020, that’s shrunk to perhaps 1.5% in a typical 401(k), and 0.5% outside http://trib.al/KkR1JwD
401(k)s are now the primary source of retirement savings for the middle class working in the private sector.
We should restore the large tax incentive and bring fees into line with taxable investment standards http://trib.al/KkR1JwD
We should restore the large tax incentive and bring fees into line with taxable investment standards http://trib.al/KkR1JwD
One easy change is to allow workers to roll 401(k) funds over to self-directed IRAs at any time (now they can do it only when they leave a job).
That would force 401(k) platforms to compete in an open market, and it costs nothing http://trib.al/KkR1JwD
That would force 401(k) platforms to compete in an open market, and it costs nothing http://trib.al/KkR1JwD
How can the government help reduce taxes on 401(k)s?
Make new 401(k) contributions and returns tax-free when withdrawn in retirement by below-median-income households.
Exclude FICA payroll deductions as well as income tax from 401(k) contributions. http://trib.al/KkR1JwD
Make new 401(k) contributions and returns tax-free when withdrawn in retirement by below-median-income households.Exclude FICA payroll deductions as well as income tax from 401(k) contributions. http://trib.al/KkR1JwD
Not only would these make the tax advantages of 401(k)s compelling again, they eliminate the danger many workers fear that marginal income tax rates will be higher when they retire http://trib.al/KkR1JwD
