News to me, thanks. Starting in 2026.
In my experience (and my line of work is dealing with 401k rollovers), that is still exceedingly rare.
Even with Fidelity 401 plans, it is not a common feature.
Per the Dept of Labor, less than 25% of all plans offer a brokerage option. And of course there are no brokerage options on 403B or 457 plans.
1 Like
It isnât just the tax deduction, it is also the tax deferral. To quote the OP:
End tax deferral on savings
If you force current employees to file a 1099 every year on money they cant touch until retirement, you will absolutely kill the 401k program. I have zero doubt. At the first opportunity, every single person that shouldnât liquidate or otherwise spend their 401k will do so.
Edit: And many/most will simply chose not to save at all. Keep in mind, we are not talking about savvy investors. These are people that often wonât even save for the free employer match - and now you are going to tax them on it too? Pshaw!
1 Like
Until a month ago, I would have said that taxing income like this was unconstitutional under the 16th Amendment. However, with the Moore vs. United States ruling, I would say that it would now be possible to tax income that the taxpayer has not received, such as gains in a 401(k). However, in the opinion 22-800 Moore v. United States (06/20/2024) (supremecourt.gov) itâs made clear that Congress must be the one to impose the tax:
(1) The Courtâs longstanding precedents plainly establish that, when dealing with an entityâs undistributed income, Congress may either tax the entity or tax its shareholders or partners. Whichever method Congress chooses, this Court has held that the tax remains a tax on income.
I suspect that, even if Congress could get their stuff together enough to propose such a law, any Congress critter who wants to keep their job (which is most of them) would vote against it, given the impacts that it would have.
I would also point out that there are other ways proposed to limit deferral, including limiting the deferred amount, possibly based on income.
AJ
Iâd definitely limit the amount of money you can hold in a Roth IRA. Iâd pick a number between $1 MM and $5 MM. Once your Dec 31st balance exceeds the limit, the excess has to be moved to a taxable investment account, within 60 days. Penalties apply.
intercst
3 Likes
In reply to myself, I was just introduced to a guy that sent $20,000 to âAirbnbâ as directed via a conversation on WhatsAp to improve his credit. He was told his credit was 8 and he need to get to 30 and if he transferred $20,000 to cryptocurrency, he would get back $30,000 plus improve his credit.
This guy appeared to be in his early 60s. No details of the above story have been changed.
While not directly related to the topic at hand, it goes to illustrate why people need protection from themselves and that changing anything about the 401k that results in less desire for people to use it - especially those that need it the most - is a recipe for failure.
3 Likes
Kind of like the Build Back Better plan, which was passed by the Democratic House, but landed with a thud in the evenly divided Senate? The limits were on total retirement accounts (combined Roth and Traditional) before distributions were required was $10MM, but the back door loopholes (including the mega back door for employer plans) were closed to limit Roth accounts. Additional contributions to large accounts were also prohibited. Build Back Better Act would curb retirement plans for the wealthy (cnbc.com)
Sad how this discussion moved from being a current conservative proposal to a liberal bill from nearly 3 years ago, both supposedly in pursuit of the same goal. Yet, nothing has happened.
AJ
8 Likes
Just jumping in here to say that one reform unrelated to this discussion I would like to see - and it isnât maybe a reform per se, just a new feature - is that I would like to see all 401ks required to allow for all accounts to have available the ability to buy and sell whatever stocks/ETFs one would like, and to allow the purchase of calls/puts as well as the ability to write both.
As for the reform under discussionâŚhonestly, I donât necessarily understand it fully, and I see good arguments on both sides. I do like the help for me personally on the tax advantage side, though, I have to concede. Yet, I do want to shore up soc sec. But maybe there is a better way to do that? Like I say, would honestly have to think about this more.
Some plans do allow stock investment. But companies often prefer to avoid the risk of being sued for losses for failure to do their fiduciary responsibility.
Great idea as long as everyone makes money. But participants will be looking for someone to blame when markets turn against them. Companies donât like the odds!!
3 Likes
That would hurt most 401k investors. The people who frequent TMF are likely in the top 1% or 2% of investing knowledge â you need to design the program for the benefit of the average 401k participant who is getting a 2% per year average return (according to Dalbar) rather than the 10%+ of the S&P 500. The more choices you give them, the more mistakes theyâll make.
Maybe we need an âAccreddited 401k Participantâ where youâd have to take a test to assure regulators you have the required knowledge to understand the risks before we open up the craziness of individual stocks and options trading to you. Then in exchange, that would absolve the employer of having any fiduciary duty to you on investment selection.
intercst
5 Likes
Paul and intercst, I completely agree with that risk. And let me admit too, I myself have made mistakes with investing, both in 401 k and my individual Roth account.
And yes, additional options can hurt people (again, I probably made some of my mistakes because of additional fund options)
Maybe a solution might be to allow investment in a select universe of stocks/ETFs? But that might up the legal risk.
Hereâs my big gripe though: like I say, everything you guys say is true and undeniable. Yet, I can stop participation at any time and play state lottery tickets. Or gamble on sports. Anyone can. That doesnât counterpoint your arguments, itâs just a weird paradox to me. Itâs funny that I donât need a license to do that.
1 Like
Sorry, but this suggestion is way too simplistic and doesnât take into account the significant prohibited transaction tax implications that would result. Investments that have the potential to generate UBTI are not appropriate in employer sponsored retirement accounts because of the costs for the plan sponsor to have to file income taxes for accounts that exceed the UBTI threshold. Similarly, not all option contracts are appropriate for retirement accounts because of the potential for the contract to result in the retirement account borrowing money, which results in the tax-advantaged account losing itâs tax-advantaged status.
Because of these issues, even employer plans that allow buying and selling of individual stocks have restrictions on investments than can result in UBTI. (I have seen plans that tell employees to sell a particular investment or theyâll sell it for you.) And I donât know of any employer plans that allow any options. I suppose it would be possible for employer plans to allow trading in options that wonât result in effective margin/loans against accounts. But that will add a lot of administrative expense to the plan for just a few employees that will take advantage of the opportunity. Seems like it would be unfair to the rest of the employees to have to bear those costs.
AJ
7 Likes