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The War on Your Retirement Plan

Do any of you remember Senator Tom Harkin from Iowa?  Thankfully, he retired before he could gain any more power and audience, and thereby become even more dangerous.  But simply having him out of office doesn’t make us safe.  There are others in Washington, D.C. who have picked up the torch.  And Harkin’s torch is indeed dangerous to you and me.

Everyone knows that politicians love to blame other people for waging a “War on ___________ “ (fill in the blank).  This is not a War on Your Retirement Plans, as some claim, but it is at least a skirmish, and properly fed, it could become a full-blown conflict.

Here’s a review of Harkin’s “legacy” for America’s workers:

  • Over 10 years ago Senator Harkin started to discuss his plan to address the “retirement crisis” in America
  • His idea of “improving” or “saving” retirement accounts appeared to me a lot closer to “federalizing” them
  • That means “allowing” retirement accounts to invest in government bonds (nearly every plan already has some traditional government bonds)
  • The next step would then be to create a new class of bond that strangely resembles a Social Security IOU
  • We would become enabled to buy these “ultra-safe” bonds in our retirement accounts, up to some percentage of the account value
  • The next step would then be to force every account to have a small portion of assets in these new bonds
  • From there it is a small step to make this small percentage grow over time
  • Eventually, all private retirement accounts would be “invested” in what I have dubbed “Social Security IOU Bonds”
  • These bonds would be subject to the “full faith and credit of the U.S. Government”

What could possible go wrong?  Let me count the possibilities:

  • First, there is the increasingly-dubious credit worthiness of our government that cannot stop over-spending
  • Then there is the lack of expected return and/or diversification within our accounts (these are related)
  • Then there is the dramatic negative effect on the markets from withdrawing all that private investment
  • And I’m only getting started

We are nowhere near that doomsday scenario just yet.  But changes are being proposed at very high levels, and we should all remain vigilant if we are determined to end this intrusion into what is now a very personal and private system.  One that works when it is practiced, I might add.

One of the current “leaders” of the Retirement Plan “Simplification” Movement is none other than the current Commander-in-Chief of the U.S.  Among his proposals are the following detrimental (in my opinion, at least) concepts:

  1. Limit Roth conversions to pre-tax dollars.  Why?  Currently many retirement plans allow employees to roll out after-tax contributions to a Roth IRA, where they can grow tax-free and never have to be taken out as RMDs.  This enables the owners to avoid taxation (having already paid tax before making the contributions) for the rest of their lives.  The Roth Conversion funds are taxed at conversion time, so he is OK with that.
  2. Eliminate the “back-door Roth conversion.  This allows some employees to contribute to a Roth IRA in years when they otherwise earn too much money to qualify for a direct Roth contribution.  Taxation issues are at the root of this, similar to point #1.
  3. Eliminate the tax break for NUA (Net Unrealized Appreciation), as this provision allows employees who accumulate company stock to get the stock out of a retirement plan at capital gains tax rate.
  4. Create RMDs for Roth IRAs.  This is one of the sneaky ways that some politicians want to increase your taxes.  Left on the Roth, funds are tax-free forever.  Distributed and reinvested, the earnings outside the Roth will be taxed.  This is not the only way they will come after your Roth IRA.
  5. Limit the deduction for contributions to qualified retirement plans to 28%.  Having raised the top income tax rates several times, they now seek to get you to pay some taxes on the contributions if your tax bracket exceeds 28%.
  6. Set an upper limit on the size of your retirement plans, after which you would lose the ability to make further contributions.  Currently proposed is a limit of $3.4 Million, which would not impact a lot of us, but any government that can set a limit can lower that limit.

More on this this topic in next week’s blog post.

There is very little we can do about some of these ideas.  If we don’t know these threats exist, there is nothing we can do about them.  That’s why one of the goals of the Van Wie Financial Hour is to keep you educated and informed about the dangers that lurk in the halls of Congress and the White House.