401k, Can the government change the tax rate on 401k plans in the future?
Posted by Dolores
RJ asked:
I know that the government has changed the distribution age several times in the past on 401k plans but I was told that the government could change the tax rate anytime and for any amount.
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I know that the government has changed the distribution age several times in the past on 401k plans but I was told that the government could change the tax rate anytime and for any amount.
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December 25th, 2009 at 5:55 pm
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Tax rate? I must be missing something because 401K plans are non taxable till you withdraw the funds at 59 1/2.
December 26th, 2009 at 1:08 am
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I’m not aware of any change in the distribution age on 401(k) accounts but maybe I just missed it.
Congress writes the laws and Congress can change them at any time. The IRS has no authority to change any laws.
December 26th, 2009 at 3:57 am
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The short answer is that congress can change the tax code in anyway it wants as long as it does not violate the Constitution. They also have ratified international tax treaties that have the same effect.
They can change the rate at which 401k withdrawals, how much you can put in tax deferred. (tax deferred is different than tax free)Currently, there is even a 401k that is not tax deferred (Roth-401k).
Congress could even decide to get rid of the 401k all together. You will need to remember that because congress can do anything, I doubt they will tax 401k withdrawals more than the regular tax rate and I doubt they will let the contribution limits decrease.
December 29th, 2009 at 5:27 am
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there are no specific tax rates for 401k’s or ira’s. when you withdraw money from them, the amount is added to your other taxable income and is taxed as ordinary income, ie no special rates for dividends or capital gains. so your tax rate on 401k will depend entirely on your total income situation and the tax brackets in effect in that future period.
December 31st, 2009 at 9:10 am
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Yes, Congress can change any of the rules regarding 401-k’s but it is unlikely, since a lot of people would be very upset.
January 3rd, 2010 at 2:46 am
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401K withdrawals are taxed as ordinary income. Congress has the power to change those rates, so yes, they can.
January 5th, 2010 at 10:29 pm
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Congress sets the tax rates and can change them at any time…they have many times. Mostly though it’s a reduction in the tax rates. While changing the rates will have an impact on 401k distributions, a larger effect would be if they increased the capital gains tax rates and then taxed 401k distributions as capital gains. YUCK!
Or, even worse…if they decide to tax the income on Roth distributions after all. While not likely, it’s entirely possible though people don’t seem to think so.