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Let’s Revisit: Will Uncle Sam Takeover Your IRA? Part II

Posted by Larry Doyle on November 29, 2012 2:53 PM |

With so much attention on the fiscal cliff and how Congress might address the issues surrounding our deficit, this commentary from this past April is going absolutely viral throughout the blogosphere today. I welcome reposting it. LD

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.

  • Randee

    You are crazy to post this tripe. In a country where it’s seemingly impossible to pass a 2 percent tax increase do you really think something as draconian as this could become law? Every day this site sounds more like one of those super “out there” paranoid sites. What next, Larry? A call to grab our canned goods and ammo and head for the hills ’cause that nasty government is takin’ everything?

  • LD

    Randee,

    How draconian is it when Uncle Sam violates a whole host of other property rights of a wide array of investors? You are not aware of those?

    • fred

      And the list keeps growing,

      In some states, liens are now being placed on auto insurance payouts for vehicle repair, it started with outstanding child support due and has now been extended to include property taxes outstanding.

      When I see a car with unrepaired damages I now wonder if the driver is a scum, a schlep, or schmuck.

      What’s next? How about unpaid traffic tickets, a late water bill or maybe even student loan debt? And what might “big brother” begin to slap liens on, why the opportunity is endless, how about ATM withdrawals, that winning lottery ticket, or maybe even 401k distributions?

      Next year, conveniently timed after the elections, Obamacare kicks in. We all better be able to provide proof of insurance otherwise tax refunds are going to be just a little bit lighter. No refund, no worries, maybe they’ll just decide to deduct it from our bank accounts when we use our debit card at the grocery store.

      Just remember, behind closed doors, with the stroke of a pen, anything becomes possible!

  • http://www.deadlyclear.com DeadlyClear

    Smart people have already pulled out their 401K, some out of sheer necessity – others because they know “first come, first served” applies. People leaving their retirement in 401Ks and mutual funds could easily end up like Hostess employees.

    Think about it. There isn’t enough money to go around for all of the mess and fraud created on Wall Street. You might as well go to Las Vegas and shoot craps if you seriously think something will be there. Move your money and invest it in something tangible… By a local government bond if you have to – but don’t leave your future up to the health or hypothetical healing of Wall Street or Washington.

    • Randee

      I am invested in stocks, bonds and mutual funds. Let’s compare notes in 20 years and see who did better. My prediction: It won’t be you.

  • Bill

    This is simply more of the thrifty being forced to bail out the prolfigate and reckless, many of whom reside on Wall St. as well as the deadbeat roles.

  • Mike

    Larry,
    I love how the govt. likes to change the rules in the middle of the game, if we tried that it would be rightfully called breach of contract, fraud, etc. I’m lucky to have a modest pension; new employees at my old company now only get a 401k with a small company match. I also have an IRA that is still untapped (I’m 67) which I hope to keep that way unless there’s an emergency or I must begin withdrawals @ 70.

    Uncle Sam is so greedy he can’t wait a few more years for his pound of flesh? I lived my whole life and raised my kids to (hopefully) be responsible, but I’m sick and tired of seeing the irresponsible be rewarded, kind of the ant and grasshopper fable in reverse.

    I won’t be going down without a fight if they come after my life’s work and savings, “if you ain’t got nothing you got nothing to lose” is the phrase from the 60′s that applies here.

    I hope the rest of the sheeple will fell the same.

    Love your column.

  • mikaele

    Wow! they can’t really get much from me till Oppenheimer gives me my money back 30 years after I’m dead!

  • Ron Larson

    Larry,

    I’ve read your posts about gov’t attacks on 401K’s and IRAs as a tax revenue grab. However, I think these posts are disingenuous. The articles you quote in your posts are all over the map. They range from capping the tax deduction on contributions, to outright confiscation of the assets.

    The tone of your posts seems to imply the worst case, a nationalization or confiscation. Or a retroactive changing of the rules.

    I really don’t think that either is anywhere near a reality. If there is a rule change, it will impact FUTURE contributions. I am confident that existing accounts will mature and distribute under the rules they were established. Worst case, they will freeze contributions to the old-rule account and require future contributions be made to new-rule accounts.

    The comments from people who claim they are stopping contributions and liquidating existing accounts because they are afraid is crazy talk. I don’t understand that.

    The real problem is not changing the tax situation on contributions or distributions. My biggest fear is that earnings will be taxed annually. If a 401k/IRA grows as designed, then when matured, the vast majority of money is from compounded earnings over time. Not contributions. Any hit on compounded earnings is what will kill a retirement account, just like a bad long term investment.

    This is what Australia does, and it bothered the hell out of me when I lived there. Australia taxes 50% of the earnings, and defers taxes on the other 50%. That a huge drag on the long term viability of a private retirement account (Superannuations they call them in Oz).

    Yet this threat, which is the real one, is never mentioned. All the hand wringing about reducing the deductability of contributions is silly.

    If they reduce what I can deduct, I will survive. It is not the end of the world. They can’t really tax the distributions any worse than they already do. Besides, that is tomorrow’s problem. If they start taxing earnings, that is a deal breaker.

  • LD

    Ron,

    I think the point of the commentaries is the fact that there are GREAT UNKNOWNS. Who would ever have imagined other lengths to which the government would have and has gone? I do not begin to pretend that I have any idea what may or may not happen BUT I do think that we have all learned that Uncle Sam is now capable of almost anything.

    Am I overly alarmist? I do not try to be. I will allow that the topic as initially propped was actually brought to me by a former colleague whom I allowed to write and I ran here at my blog.

    Again, I am not trying to be disingenuous. I never have and hopefully never will.

    If this can get people to talk as you have right here then that is progress and I thank you.

  • Frog

    The moment they impose an increase of tax on the withdrawl or make a change to the “before tax” contributions I will remove it from the 401k to gold or savings, or send it overseas. I am tired of this government and this is what Liberal voting and practices does to a society, you want to see good previews look at the state of CA. They have stupid moron’s like Barbara Boxer running that hell hole and have an amazing debt. Take a look at Detroit, who runs that? (I’ll let you figure it out). There is too much PC, taxing, demonizing the rich and successful, for a much bigger agenda. Low information voters seem to vote Libs in office, some genuinely are Socialists or Dems and intended to vote that way. I have found through much searching that between the 2 biggest parties that Conservatism cares about your personal gains and wants you to be successful on your own with a modest tax. The liberals seem like they would be amazingly happy if they could get 90% of the country on welfare and working for it through some type of government program (that is a marxist dream).. Fortunately I don’t think this will happen, there will be a tipping point. If I controlled the country I would have a “night of the long knifes incident” to destroy people like Bloomberg and Boxer.






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