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Will Uncle Sam Takeover Your IRA? Part II

Posted by Larry Doyle on April 24, 2012 7:23 AM |

Those engaged in massive strategic maneuvers know all too well that progress is typically made not in one fell swoop but painstakingly inch by inch.

With deficits beyond the scope of imagination but oh so very real, I cautioned people to keep a watchful eye on Uncle Sam. Where might the old man go to beg, borrow, or steal money to fill that enormous fiscal hole? Your retirement accounts. I first broached this topic in early 2010 in writing, Blueprint for Government Takeover of IRAs and Will Uncle Sam Takeover Your IRA?.

Fast forward and we now witness rumblings around Washington that the drunken sailors disguised as our political leaders are discussing how to make a move on your retirement savings. 

This tactical assault deserves to be front page news on every credible financial periodical. Regrettably, but not surprisingly, the only outlet which I could find carrying this story is The New York Post which wrote, Feds Eye Retirement-Fund To Cut $16 Trillion-Plus Deficit:

Uncle Sam, in a desperate attempt to fix its $16 trillion-plus deficit, is leering over Americans’ retirement nest egg as its new bailout fund.

Capitol Hill politicians are assessing tax changes that could let the Internal Revenue Service lay claim to a portion of the $18 trillion sitting in 401(k) accounts and other tax breaks used by middle-class workers, including cutting the mortgage tax deduction.

A commission looking for ways to close the deficit, and, noting the extent of 401(k) tax breaks, recommends an examination of the system as one way to prevent government bankruptcy.

Under current 401(k) rules, total employee/employer contributions can’t exceed $50,000. In the proposed rule change, employer/employee contributions would be limited to 20 percent of the employee’s compensation, with a maximum of $20,000, the so-called 20/20 proposal.

This component strikes me as merely a tax on savings. When will the nitwits in Washington realize that our nation needs to increase its savings rate, not decrease it. But, please, now break out your vomit bag and then rally the neighbors.

Another proposal being discussed in Congress says all tax deductions on 401(k)s and IRAs to be replaced with an 18 percent credit. The credit, according to a proposal that has been endorsed by economist William Gale, would be placed directly in a person’s retirement account.

What does this mean? You will pay a tax NOW on your retirement savings and be granted a government credit which kicks in LATER. This tactical assault is little more than another government scam. Do you want a government credit which can be massively devalued over time by inflationary policies implemented by the Federal Reserve?

“Unlike the current system,” Gale told Congress, “workers’ and firms’ contributions to employer-based 401(k) accounts would no longer be excluded from income and would be subject to taxation, contributions to IRAs would no longer be tax-deductible and any contributions to a 401(k) plan would be treated as taxable income.”

In other words, the employee and employer would no longer get a deduction under the Gale plan, they would qualify for a credit. And the credit would “increase [government] revenues by about $458 billion,” Gale says.

My immediate reactions to learning about these discussions last evening are two-fold:

1. Taxation without representation is tyranny.
2. Get the pitchforks ready and clean out the back of the trucks so we can haul the charlatans behind these assaults out of our nation’s capitol….(stated figuratively of course!!)

How many people out there who have played by the rules, saved, paid in, and supported our government have had enough? Do not think for a second that these maneuvers by Uncle Sam are the end of his assault on our savings. We are supposed to blindly and willingly accept a change in the rules of the retirement savings operation while the dysfunctional elitists in Washington squander OUR money on prostitutes, boondoggles, gallivanting, and largesse to THEIR political supporters.

I DON’T THINK SO!!

If you agree with my sentiments, I hope you will share this story so we can draw the line and make our stand.

What do you think?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred

    Another 401k scam run by the federal gov’t occurred in 2009. The feds allowed IRA withdrawal recipients to waive minumum withdrawal requirement because of the hardships being inflicted by the ‘great’ recession (huh?, wouldn’t hardship argue the opposite, the need for a greater distribution?).

    The custodian banks brokers ins co were happy to market this waiver because they collect a % of Assets under mgt.

    So far so good, until the following years when this waiver no longer applied and minimum distributions were required to be taken by Dec 31. Custodians did not reinitiate minimum distributions or notify IRA owners of their on again off again responsibility, they sat on their hands and collected their fees.

    Some of the more astute, IRA owners may have realized no distribution in the tax preparation process, but the less astute may not have realized the lack of required distributions to this date, more than two years later.

    But whether astute or not, many missed the distribution deadline Dec 31, (tax return preparation normally occurs after Jan 1 when you receive 1099′s and bank statements).

    The penalty for not taking the minimum distribution is 50% of the amount required but not taken. Interestingly, the IRS is now quietly implementing a change for tax year 2014 requiring custodians to notify IRA owners of there minimum distribution responsibilities before yearend.

    In the meantime, alot of elderly are faced with thousands of dollars in penalties and interest when all they were trying to do was help out their country in time of need.

    When you can’t trust the gov’t and the gov’t starts playing ‘GOTCHA’ with the elderly (which will someday be all of us), we’re in trouble!

    • Don

      So I guess you’d be for less government not letting people know they’re about to be penalized? You’re an ass if you think people shouldn’t be required to manage THEIR financial business. The rules have been in place forever. My folks have it on a calendar: “IN OCTOBER, GET MINIMUM DISTRIBUTION”. You either want the government in or out. Make up your mind and live with the consequences of your decision. Me, and many like me, are getting tired of you and your kind conveniently using the government as a scapegoat for your PERSONAL SHORTCOMINGS!

  • RB

    We’ve been in trouble for a long time here in the U.S. and it is going to get considerably worse before it gets better. This is just one of the first steps.. They will eventually not be satisfied with just the taxable amounts and will “give-in” to our pleadings and restore future tax shelter to such savings but only if we move all of our savings to new U.S.Gov’t issued annuities.. wherein they will have garnered full control of ALL retirement monies and the elderly will never see that money again.

    Yes, we will be promised a small regular stipend from the new fund, just like the original Soc. Security ponzi.. but the payments won’t last long before they default, having spent all the monies on their corrupt schemes to maintain the status-quo.

    I am not even sure expatriating would work any more as they continue to close the windows of opportunity to move our assets outside of the country. First they burden other countries so heavily that they no longer wish to open accounts for Americans, then they put in place very sizable fees that we must pay to move our assets out of the country and next will come new capital controls and passport restrictions, in hopes of closing off the expatriate route entirely, except for those who have little financial net worth and thus cannot be bled of meaningful assets in any other manner.

    To think that we will somehow escape all of governmental theft to come, including eventual reduction and final elimination of Soc. Security and Medicare for any but the totally indigent.. is quite naive. The government will take whatever steps they feel are necessary to appropriate the remainder of the wealth of the middle class. It is quite clear that they have absolutely no intention of materially cutting government spending until they have robbed us of every penny.

    However, good luck getting people to stand up and be counted.. they still foolishly believe the government and the media are there to keep them informed and protect them. As long as the average American still has a job, has plenty of beer and pizza in the fridge and a big screen TV in the living room to while away their evenings and weekends, they think all is well and that those of us now sounding the alarm bells are nothing but crackpots and lunatics. If you believe otherwise, rest assured that you will be sorely disappointed.

  • Jim

    This is why I didn’t convert to a ROTH. Additionally, the sound…ching, ching, POW comes to mind.

  • Comrade

    The camel is trying to get his nose under the edge of the tent.

  • Disenchanted

    This is a great article. I worry about my children and grandchildren’s future more than mine.

  • Bruce

    Larry,

    Since I bought my first gold back in 1974, I have maintained its independence from any and all government. I went to an investment conference in Nassau in 1978, where a Colonel Harwood extolled Anglo American and DeBeers for their 30% dividend. That little advice sure paid off. He also extolled gold, so he was preaching to the choir with me. Well, gold has averaged over 7% annually since then. Physical, not paper gold. It is the ultimate insurance against gov’t confiscation of our assets. As long as you can hide it. As he explained, not in the US. So, I’m safe. Are you?

  • Ron Larson

    Larry.
    I think this article’s title is very misleading. It makes it sound like they want to nationalize your IRA/401K. Nothing of the sort.

    Basically, the article discusses considerations of collecting taxes due on IRA/401K earlier than planned. The deal was to defer taxes, not to avoid them outright. This just changes the when. And yes, I know that impacts earnings potential.

    I suspect what will happen is that a new set of IRA/41K deferred tax rules will come in to play. The old accounts will have their contributions frozen, and they will mature and distribute under the old rules. Future contributions will be made to new accounts with new tax rules.

    Many counties on earth tax both the contributions and the earnings on retirement accounts. For example, in Australia, they tax both at 50% discount. In other words, they take half the taxes now (annually), and the the other half at distribution time. I suspect that is the model the US will eventually end up with.

    I think a bigger worry, which is not mentioned here, is a means test on “public pension” benefits. In the US, that means that you could be denied SS retirement benefits if you make the mistake of also saving enough money in an IRA/401k/Investments, etc. If you manage to save $1M in your 401K, then that $2300 a month in SS they promised you at age 69 is gone. All your FICA taxes paid are for naught.

    Most counties, unlike the US, have a public pension that is paid out of general tax revenue. So they means test it. You are punished for success.

    The US is very unique in how SS retirement benefits are taxed, paid for, and paid out. It is the opposite the of the rest of the world. We limit contribution taxes to the first $120k or so of income. And we guarantee benefits (aka no means testing), albeit on a progressive scale.

    As the SS reserve gets depleted faster thanks to “tax holidays” like we currently have, it will eventually require contributions from the general funds. At that point we have the same public pension system like the rest of the world. And then there will be pressure to remove the contribution limit on the front end, and to implement means testing on the distribution end.

    • Darren Ulrich

      Asshole!

    • http://truth.byrushdelivery.com mourningdemocracy

      You miss the most important part of the SS scam and that is the real cash that people paid into SS, is transferred to the general account making it available for spending as the treasury sees fit. The money is replaced by Treasury Bonds, which appears to be a secure bond, but what nobody is saying is that all bonds are under-written by taxpayers. So, not only is the cash gone, the taxpayers have to fork over that cash again PLUS additional cash to pay new recipients and growth.
      That’s a Ponzi scheme rotten with fraud. These guys ought to be thrown in jail like Bernie Maddoff is.
      Are we stupid or what.

  • LD

    Ron,

    Thanks for your comment.

    The point of my article and thus the title is that I believe this may very well be merely the first move on our retirement savings. Having written those prior articles in early 2010, this now becomes Part II.

    Those engaged in massive strategic maneuvers know all too well that progress is typically made not in one fell swoop but painstakingly inch by inch.

    With deficits beyond the scope of imagination but oh so very real, I cautioned people to keep a watchful eye on Uncle Sam. Where might the old man go to beg, borrow, or steal money to fill that enormous fiscal hole? Your retirement accounts. I first broached this topic in early 2010 in writing, Blueprint for Government Takeover of IRAs and Will Uncle Sam Takeover Your IRA?.

    Do I trust Uncle Sam to stop the move on taxing our retirement funds up front with a credit scam on the back end? No I do not.

    I wholeheartedly concur with you in regard to Social Security. I think we will see the age extended and then a means test employed.

    Thanks for the substantive comment.

  • Bill

    This is consistent with bailing out the have nots. I read recently of some guy who had a job that paid $100K and got laid off and had zilch in savings because he had spent everything he made on cars, eating out, etc. Unable to find another job, the guy started drawing SS at 62. Thing is, as we all know, guys like that have the same vote as those of us who were frugal and saved something up.

  • Kimberly

    Did you know that at 59.5 you can take your 401K out of your companies program and roll it into your own self directed IRA….my husband just learned he could do this and did it-even though he’s still employed with the same company…now we have alittle more control over it. You can also get IRA $ before age 59.5 without penalty by doing a lifetime averaging of your IRA…calculate lifetime expectancy and take even distributions as designated…then just pay tax on it as ordinary income.

  • Don

    I think if you didn’t see this coming you were blind. I think that maxing out life insurance contracts right up to the MEC will prove to be a very valuable tool. The cash value is then borrowed back and there’s zero tax liability. The returns are consistent & safe. Just a thought – clearly, the tax laws can change regarding this, too.

  • Obsvr-1

    Many moons ago when I was first started out in my career, the 401K program started. At that time I said “good bye SS” as the government will likely say when I get to retirement age “Good boy, you saved for your own retirement, so you are no longer eligible for SS”. Now, that is not a bad idea, as long as the government would allow one to opt out of SS (or at least have a tiered tax system based on how much one funds their own 401K — but I digress).

    As for the SS system itself:

    If folks really understood the operations of the gov’t and the use of the SS “Trust” fund to hide spending (deficits) and perpetuate the shell game of political gamesmanship.

    Once the SS “Trust” fund was put under the Unified Budget (I believe by Pres. Johnson) the structure of a “Trust Fund” retirement system was forever changed. The gov’t takes all the payroll taxes (FICA) and uses it to pay/fund/offset contemporaneous budget expenses; in trade they through in a IOU (Special issuance Bond, intergovernmental debt instrument) into the empty carcass of the “Trust Fund”. Now for the fun part of a mental exercise to uncover the 3 part tax system of the FICA game

    1. Withhold 12.4 % payroll tax from the working class; the rich get to bail out of the system at $110K
    2. Income taxes used to pay interest on the bonds (or add to the tab, Nat Debt)
    3. Income taxes used to pay the bond when it matures (or rollover to “kick the can”)

    If folks could (would spend the time to) understand how the SS system has been corrupted from the original intent into this shell game, then the histrionics of an insolvent system would be replaced by a call for massive change in the gov’t budget (enables waste, fraud and abuse) and the tax code (Franken-tax).

    And the worst part, SS is a barrier to intergenerational wealth transfer. Once you die your SS payment stop. But if you were allowed to put the 12.4% into your own 401K or fund life insurance, then that wealth would be transferred to your heirs.

    • Ron Larson

      You have made a mistake that is very common with critic of the US SS system. You compare it to a self funded retirement account and find that it comes up short.

      In order to compare apples-to-apples, you need to compare SS to an annuity with (a) a life-long disability insurance benefit, (b) COLA adjusted life-long pension benefits, (c) guaranteed life-long pension benefits, (d) doesn’t cancel on you because you are disabled, unable to work, and miss a premium payment one month. Also you better hope that your insurance company doesn’t declare BK during your life and tell you go pound sand. Good luck with that. You will find that it is impossible.

      And no cheating by looking at LTD plan quotes that aren’t 100% honest. If you look at the fine print, you will find that they factor in your SS disability benefits in to their benefits statements. For example, if you buy a LTD policy to give you $60k/year in benefits to survive, they will subtract your SS benefits from the $60k you seek. In other words, you are really buying insurance for the gap between SS and you you think you need. If you had to buy the whole thing, your premiums will cost much, much more.

      I’m not saying the SS is perfect. But there is a hell of a lot more to it than just retirement pension. It was never designed to be one. It is a wider social safety net that we all are a part of. Hence the name…

      • Obsvr-1

        not my point to compare SS with self funded retirement. Intent was to get folks thinking about the total cost (taxes) to support the mutated (post unified budget) and more insidious, the loss of intergenerational wealth transfer.

        As for social safety net, I like the idea of safety nets; but the problem is like with most of the safety nets, they become more of a hammock then a safety net.






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