What they should do is scrap the current 401K plan. As usual, pointing out problems is infinitely easier than proposing solutions. Surely, structuring the incentives correctly is a step in the right direction. As an aside, Trump claims to want to restructure wall street. Here is a perfect example of how instead he plans to do the opposite. [Real story below - this just points to issues in the 401K] For millions, 401(k) plans have fallen short Kelley Holland | @KKelleyHolland Monday, 23 Mar 2015 | 7:00 AM ET http://www.cnbc.com/2015/03/20/l-it-the-401k-is-a-failure.html How the new 'fiduciary' rule will actually affect you Comstock Images | Getty Images A new rule is about to shake up your retirement accounts and therelationship you have with your advisor. On April 10, 2017, the Department of Labor, the federal agency that oversees retirement plans, enables its so-called fiduciary regulation. Starting on that date, broker-dealers and financial advisors will be required to provide advice that is in your best interest. It may seem surprising that wasn't always the case, yet the White House Council of Economic Advisers says conflicts of interest by investment advisors leads to $17 billion in lost income every year for most savers. Retirement accounts are a big business for advisors, broker-dealers and the institutions that hold and invest your savings. As of the end of the second quarter of 2016, IRA assets totaled $7.53 trillion, according to the Investment Company Institute. "The Department of Labor has done what the Securities and Exchange Commission is unable to do: create an enforceable best interest standard and rein in conflicts that aren't in the best interest of the investor," said Barbara Roper, director of investor protection at the Washington, D.C.-based Consumer Federation of America. "While there may be some hiccups along the way in terms of implementation, the ultimate outcome is better advice and lower costs," she said. "We are already seeing that." Financial services firms are preparing their businesses ahead of the rule. For example, Merrill Lynch recently announced that it would stop offering new commission-based IRA brokerage accounts through its advisors as of the April date. Instead, clients will have three options for retirement-related investment advice: They can work with an advisor on a fee-basis, where he or she will be paid a percentage of assets invested. They can also use commission-based, self-directed brokerage accounts, or Merrill Edge Guided Investing, a fee-based robo-advisor option that will start early next year. Here is what you can expect to see happen in coming months. How will the rule affect my advisor relationship? ... http://www.cnbc.com/2016/10/19/dona...to-act-in-clients-interests-insider-says.html
The core problem is that ever-increasing Fed/state/local taxes now chew up ½- ¾ the income of typical middle/upper-middle households. There's little or nothing left to save and invest after bearing that tax load. The real answer is max Fed personal income tax rate of ~15%, max state rates ~2½%, Proposition 13- style property tax relief nationwide, elimination of Fed and state death, cap gains and corporate taxes, and an end to SS tax increases. Imagine the explosion of growth and prosperity if the aggregate household tax load fell by ½- ⅔, not to mention the effect on retirement savings.
That is a utopian pipe dream. Taxes are only headed one way and its up, up, UP!!! With hillary being our next prez. Maybe in 2020 we will get somebody like Paul Ryan who steers toward prosperity economics instead of welfare economics.
What does the term "ever-increasing" mean to you? The table below is a graph of the top and bottom federal tax rates in the U.S. since 1910. They certainly don't appear to be "ever-increasing" by any definition of the term that I've ever heard, but maybe you have another definition where that means "goes up and down but is generally far lower now than it was in the past"? And long-term capital gains taxes are also pretty much the lowest they've ever been, certainly they aren't "ever-increasing" as you can see in the second chart below. Dividend taxes have actually nearly monotonically decreased, per the third chart. I can't comment on your state and local taxes unless you tell us where you live, but I can tell you it's pretty universally acknowledged that Prop 13 killed public schools in CA something I can tell you I personally experienced living there. Smart well meaning people can disagree on the impact of cutting taxes on the economy. However you don't get to just make up things like "ever-increasing" taxes when it's demonstrably inaccurate at least at the Federal level. And don't pull the "there used to be tax loopholes" crap, given recent revelations it's clear that there are still plenty of those around.
Ever-increasing means a greater % of your life working for the government, a smaller % for yourself and your family. That's what matters, not the headline rates.
I pay the headline rate. And the capital gains rate. And the dividend rate. I don't do anything on 4/28 per this chart, it's meaningless. You stated "ever-increasing Fed/state/local taxes now chew up ½- ¾ the income of typical middle/upper-middle households". First, there's no support for the 1/2 to 3/4 number at all, even if you lived in Westchester County no middle/upper-middle income family is seeing 3/4 of their income going to taxes! Second, you clearly stated "typical middle/upper-middle households". The link you provided is an average of all taxpayers, a graph of the date for a "typical middle/upper-middle household" would look far different and wouldn't support your assertion at all. It's a nice soundbite, but like all black and white over-simplifications it misses a lot.
An affluent couple living in Westchester Cty is paying ~40% Fed income tax rate plus ~12% SocSec (yes, half is hidden as 'employer contribution') on up to $127k of income. Plus NY state tax of ~7%. Plus local property tax of ~$30,000 on a typical home. Plus sales tax, gasoline tax, etc, on whatever's left. And rates are even higher in NYC.
OK, so let's do the math (Keeping in mind I picked Westchester knowing it has among the highest property taxes in the country and it's in no way representative of your average American). Let's also be generous and say you consider $500,000 a year a middle/upper middle class income. While the top marginal rate is 39.6%, that only applies on income over $415,050 so you pay a blended rate. When you do the math on that it comes to $154170 or 30.8%. Let's also be generous and count both halves of SS, so that is $15240 or 3%, so we're up to 33.8%. Add NY state tax, also graduated so when you do the math that comes to $33,331 or 6.7%. So we're at 40.5%. Now lets again be generous, and say a $1.5M home is "typical", because that's what would get you a $30,000 property tax bill in Westchester. So that's another 6%. Except you get to deduct that from your federal taxes, which reduce them by $11,880 so that brings your federal bill down from 30.8 to 28.4%, or 2.4%. So we're now at 40.5+6-2.4=48.9%. Run Westchester and $300,000+ through the IRS local tax calculator and you get $1360, or .3% so we're now at 49.2%. This is with very generous calculations (toward maximizing taxes) in one of the most taxed places in the country. It ignores any other deductions you might have, and the fact that you're right in the AMT "sweet spot" so you could probably actually get your federal down to 28%. And it assumes that none of your income comes from dividends or long-term capital gains, which would drive your tax rate down even more. I understand you feel like you pay a lot of taxes and it's human nature (plus the fact that our incomes generally rise as we get older) to feel like we're paying more than we were. As I've shown, feelings don't match reality when you actually do the math. Tax rates most certainly aren't "ever increasing" and not only doesn't your average middle/upper middle class person pay 3/4 of their income in taxes, but pretty much no middle/upper middle class person even gets close.
Deductions for upper-middle taxpayers (as in your example) no longer have much value because of tricky limitations added to the tax code in recent years. Ask your tax preparer about it. So your calculation gives >50% (correcting for your "deduction" mistake), and that's omitting taxes on after-tax income such as sales and gas, which you "forgot" in your analysis. And again, NYC is even higher. So we can agree my "chew up ½- ¾" was correct. ... Thanks for playing!
I don't need to ask my tax preparer, I do those deductions every year. In general the phaseout for things like mortgage deduction, another I didn't mention in the interest of being generous, is that for every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. So the hit is limited to 80% for everyone and doesn't have a huge impact at $500,000 a year And, as I mentioned, if you fall under AMT so you can't deduct property taxes you also get the flat 28% tax rate so you're actually better off if you're in the $500,000/year "sweet spot" for AMT. Additionally there are still plenty of deductions you can take, none of which factored into my math. I did include sales tax, that's part of the IRS calc I cited. But lets say you disagree with that and I'm generous so I say that the difference between 50% of your income I showed and 75% you claim is all due to gas and sales tax. That means you pay $125,000 a year on gas and sales tax, and that's only if you spent all your money on gas and sales taxable items (instead of say, paying your mortgage)! If you already paid 50% of your income in taxes, that means you faced a 50% sales and gas tax rate ($125,000 of the $250,000 you have left)! That's patently absurd. I've done the math on my taxes, living in a suburban area in a high tax state, and I'm paying a good deal less than 50% of my income in taxes, including sales, property, gas, and even tags for my pets and my license fees. As someone who is solidly upper middle class. Do the math on yourself, it won't take you long. What is your number? Note: Being dismissive while ignoring the math staring you straight in the face isn't what mature adults do. I generally count you as one of the mature adults here. I've admitted I'm wrong on a number of occasions here, you might consider it.