Federal Government matching Ira and 401k's

Investment Analysis Clubs Macro Economic Trends and Risks
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A major change coming in 2027 could boost the retirement savings of millions of lower- and middle-income Americans. The federal government will start matching 50% of retirement account contributions up to $2,000 per year through the new Saver’s Match program. This money injects funds directly into savers’ accounts rather than simply reducing tax bills. For qualifying individuals, the Saver’s Match presents a prime opportunity to amass meaningful savings. But, you may need to take steps now to ensure you fully capitalize on this retirement windfall.

Andy

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so…will the “JCs” feel they are relieved of the “burden” of providing any match at all to their employee’s 401k

Where is this government money coming from (I know, silly question, from debt of course, as if the deficit isn’t big enough already, but hey, if it removes a “burden” from the “JCs”?)

Steve

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I suspect Steve not many people will take advantage of it because the targeted group do not have much money to save. It’s a nice gesture that people will point at but in the end will not move the debt needle.

Andy

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People, increasingly, do not have much of a choice in participating in a 401k, whether they can afford it or not.

Some years ago, Congress passed a law making “automatic enrollment” in an employer’s 401k officially legal, but implementation by employers was still optional. Many new employees will hesitate at pushing back against their new employer, only a few weeks after they were hired in, and, instead, will accept the default skim off of their pay.

#44 established a voluntary personal savings plan for amounts too small to provide an attractive skim for Wall St. The “myRA” program was shut down in 2017, because it was costing the Treasury Department so much to administer.

“Secure 2.0” made automatic enrollment implementation mandatory for employers, starting with a minimum 3% skim, escalating at 1% per year up to a 10% skim. As well as paying the “JCs” to go along with the scheme.

When we old phartz were in school in the 60s, we were lectured about how retirement funding rested on a “three legged stool” of SS, personal savings, and a company funded pension. The “JCs” have since taken the pensions away from most workers. Worker pay has not kept pace with “JC” pay escalation, so personal savings are harder to accumulate when life intervenes (spouse, spawn, mortgage, divorce) And SS is being targeted for cuts. Yes, retirement funding is a problem, but the “solutions” always cluster around taking more money away from worker current income, and government spending, because “must not burden the JCs”.

Steve

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Oh c’mon. The change meant that when an employee is doing their induction paper work instead of checking a box that says “I opt into the 401(k)” they instead checked a box that said “I opt out of the 401(k)”.

The knock against the 401(k) is that most of the benefits flow toward high earners who don’t need help saving.

That said, in recent years Congress has worked hard to make sure lower income people don’t get any tax deductions. The 401(k) is one of the tax deductions lower income people can still get, and with no hassle. It is an easy way to save money, and the immediate tax deduction makes it more affordable for people who need the help.

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You win another pump seal company story.

Back then, the company offered a company paid, defined contribution, pension plan, that did not cost me anything out of my paycheck, so I was fine with that.

What they did deduct from my paycheck for was life insurance. I already had a $10k policy, that I had had for a decade. When I hired in, they automatically signed me up for more life insurance, and started taking money out of my paycheck.

Around the end of 79, the COLA had bumped up my pay significantly, as anyone that remembers the inflation of that time would expect. One day, I received a letter that, because my pay had gone up, they were automatically signing me up for more life insurance, and would be taking more money out of my pay. I already had significantly more in life insurance that I had in debts, so the additional insurance was pure waste, from my perspective. So I dollied down to accounting to opt out of the extra insurance, as that letter said I could. Good GOD what an argument I got. I think that argument went on for two or three days, before I finally got loose of that extra insurance payment.

Extra bonus story:

The last place I worked, from 2006 to 2011, had a 401k. As soon as I hired in, the CFO came around to my cube asking why I had not signed up for the 401k. I explained that I had an IRA, had had that IRA for 25 years, and that was my retirement fund. Participating in their 401k would mess up my tax deduction for my IRA, so I declined. That wasn’t the end of it though. He kept coming after me, over and over, year after year, hounding me about that 401k.

One day, I received a letter from their 401k administrator, thanking me for opening an account. I had NEVER authorized that, had told the CFO I didn’t want it, REPEATEDLY, for years, but he opened an account anyway, though he was not taking anything out of my pay.

Smells to me like the “JCs” get a kickback from the companies they sign there employees up for. There is no other excuse for the nonsense I had to put up with.

Steve

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Yep my company did the same thing. Everyone was given a 401k that the company opened up for them. The company put 1% of our pay into it and we didn’t even have to contribute. One guy I worked with went to the company and really raised a stink because he thought why would the company give him something for nothing. Every good deed goes unpunished LOL. They removed him on his insistence. I stayed in and received 1 percent for years, no strings attached.

Andy

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How would that impact an employee’s tax deduction for his payments into his IRA?

The CFO did not remove me from their 401k, no matter how often and loudly I demanded to be removed. He just ignored me, because he was a big shot, I was a peon, and what I said didn’t matter.

Steve

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It didn’t, but why would that matter? Let’s say I give you a 100 dollars, would you complain about that?

That is really sad. I would have removed you, but first I would have asked for written confirmation. Just in case.

Andy

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Sorta, but not really. There is an income cap in deductible IRA contributions if you are covered by a retirement plan at work. But the 401(K) deductible contributions are much higher.

In other words, you can make a lot more in deductible contributions through your 401(k) than your IRA regardless of income.

The other thing is that if you do hit the IRA income deduction limit you can make a non-deductible contribution to your IRA and then immediately convert it to a Roth. That’s a great deal and a wise tax-planning move in the future.

And if you are a very high earner, once you hit your 401(k) limit, most providers (Vanguard, et. al.) allow you to make non-deductible contributions to your 401(K), which they will automatically convert to a Roth 401(k). Again, that allows you to avoid a bunch of tax for no other reason than you made a lot of money.

Remember, the tax code was written to primarily benefit rich people. The 401(k) is no exception. But in this case if you are a good saver you can capture some of the benefits intended for rich people.

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I had been in Office Depot’s 401k in the late 90s, while also paying into my IRA. I don’t recall all the details, it being 25 years later now, but it was not advantageous, vs putting my surplus savings in a cash brokerage account. Given my analysis of my participation in OD’s 401k, I did not enroll in WPI’s 401k, and no-one bothered me about it. Then I went to the moving company, and the CFO made a federal case out of it.

When I retired, I made a further discovery. I had expected that, when I started distributions from the IRA, the “after tax” money would come out first, like the “after tax” money you pay for an annuity. Wrong. I need to fill out an additional form every year, to calculate how much of my annual distribution is “after tax”. The amount that comes out tax free is the proportion of the distribution that equals the proportion of the IRA balance that is “after tax”. So, the untaxed part of each year’s distribution is tiny. I will be filling out that extra form every year for the rest of my life.

The one real, blue ribbon, mistake I made was not converting the IRA to a Roth the moment that option was available, and the IRA balance was still small. Remember the sales pitch of the conventional IRA? “you will be in a lower tax bracket after retirement, so you will pay a lower percent on the distributions each year than you deducted from your taxes for the money paid in”. I never imagined the stack would get to where it is. I started taking distributions as soon as I could, to knock down the IRA balance, to lower the RMDs later.

But, getting back to you’re “Oh c’mon” comment, if the “JC” really wants to skim off your paycheck for a 401k, or insurance, or anything else, saying “no” is not easy. saying “no” may get you into an argument, saying “no” may be a career ender at that company.

Steve

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Meanwhile we have more people retiring with no savings and nothing but Social Security and Medicare. Are they headed for welfare support? Food stamps.

Companies strongly oppose defined benefit pension plans. They send their earnings up and down with the stock market–out of their control. Hurts bonus plans.

What is the best solution? More government? Bigger Social Security? Choices have to be made!!

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Lots and lots of, uhm, “thoughts” in the HofR…and prayers every hour. That’ll fix it good. If not throw whoever is the current Speaker onto the heap of speaker bones as an earnest sacrificial offering and select a New! and Improved one.

david fb

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