February 07, 2014 at 11:47 AM EST
Will the Government Take Your 401(k)?
I see little reason to think politicians in D.C. won't try to get their hands on 401(k) accounts. How can you protect your retirement?

This Article Originally was Published here: http://www.wealthdaily.com/articles/will-the-government-take-your-401k/5016

The subject of possible 401(k) confiscations has become far more popular in the last few years. This is justified, given the fact that the U.S. government continues to run huge deficits with little end in sight.

There are really two questions that we need to attempt to answer here. First, will the U.S. government try to confiscate 401(k)s and other retirement accounts? Second, if the politicians do try, will they succeed?

At this point, I see little reason to think politicians in Washington, D.C. won't try to get their hands on 401(k) accounts. Sometime down the road, the Federal Reserve will have to stop funding the deficit — or at least severely cut back. It is simply unsustainable for the Fed to keep creating money out of thin air to buy government debt. At some point, it will face higher price inflation and will be forced to cut back or stop.

The federal government has been enjoying something of a free lunch for the last several years. The Fed, along with the central banks of China and Japan, has been buying up huge amounts of government debt, keeping interest rates low and enabling huge deficits. 

When this party finally comes to an end, the politicians in D.C. are going to have to figure something out. They'll need to get a lot closer to a balanced budget than what we see today. This means they will have to cut spending or increase tax collections.

My guess is it will be some combination of the two. The politicians will not like having to cut any spending, but they may have little choice. But that doesn't mean they won't try to soak more money out of the American public.

401(k) accounts are an obvious source that is virtually untapped. People do have to pay taxes on traditional 401(k) accounts when they withdraw money, and they have to pay a penalty for early withdrawals. But it is hard to imagine that politicians won't try to go after the many trillions of dollars that are just sitting there.

Subtle Confiscation 

If there is a confiscation of 401(k) accounts, it will happen subtly. The government isn't going to announce one day that everyone has to fork over half of his or her retirement account. If they did this, they would have a revolution on their hands.

Instead, small and subtle measures will be put into place.

For example, the government might set up a guaranteed retirement fund that is backed by the full faith and credit of the U.S. government (whatever that means). You would have the voluntary option — at least at first — of putting some of your 401(k) money into this special retirement account that would supposedly give you guaranteed safety and security for your money.

If the government deems this successful, then it could eventually force everyone to put a certain portion of their retirement accounts in this particular fund.

Meanwhile, the government would treat this fund like it treats the Social Security trust fund. The politicians would simply spend the money and write a bunch of worthless IOUs for the special fund. 

The beginning of such a plan may have just started with Obama's new "MyRA" proposal. This program could eventually be expanded beyond just lower income people. Eventually, the politicians would try to gradually convert it from a voluntary program to a mandatory program. It would turn into Social Security Part 2. 

Another strategy for the politicians is to just up the ante on the current taxes and penalties that are already in existence. If someone makes an early withdrawal, maybe the penalty will be 20% or more.

And we won't be without class warfare. I'm sure some politicians will suggest 401(k) withdrawals should be taxed at an even higher rate, particularly for those who make a big withdrawal or already have a big balance. Or maybe Social Security won't be paid out to anyone who withdraws a certain amount of 401(k) money.

There are all sorts of tactics that will be tried. Some will fail. Others may work.  It will depend on how well the politicians can disguise the confiscation and how much voters believe them.

If voters are given a choice (probably a false choice) between getting Social Security checks and paying large taxes on 401(k) accounts, I fear many voters will choose the road of more plunder.

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Public Opinion

The determining factor of whether 401(k) accounts will be confiscated — directly or indirectly — will ultimately lie with public opinion. If a great enough number of people would be outraged at any suggestion of a confiscation, it would prevent the politicians from succeeding.

It may not seem that politicians pay attention to the voters — and in many cases, they don't — but ultimately politicians rely on the consent of the general public. If public opinion is strong enough in favor of property rights and against any form of retirement account confiscation, then politicians will fail in trying to get this money.

You might say, "The politicians have already spent all of the money in the Social Security trust fund, so what is to stop them from doing the same with 401(k) accounts?" But there is a difference. In a 401(k), the owner's name is actually attached to it. It is not some kind of a general fund like we see with Social Security. 

I believe many Americans still value the idea of property rights, and because 401(k) accounts are individually owned and were individually built up through deferred savings, most people will respect that and realize it wouldn't be right for the government to take it.

For this reason, I think the government will likely fail — at least in any kind of direct confiscation. Perhaps the politicians will succeed with slightly higher tax rates and tighter rules on withdrawals, but I think that will be the extent of it.

If there ends up being any kind of direct confiscation, I think there will be warning signs.

Disadvantages of 401(k) Plans 

I know a lot of people like their 401(k) plans. They especially like the employer match because it is like free money.

But personally, I would never recommend going beyond this match in your contributions. There may even be times where you are better off not contributing at all.

This is coming from someone who thinks there is a low probability that the government will succeed in directly confiscating 401(k) retirement accounts. But the government still exercises a great amount of control over these accounts.

When you put money in a 401(k), you are locking it up for a long time (unless you are already near retirement age). If you are still working for your employer that sponsors the plan, you will not likely be able to take any withdrawals at all unless you do it in the form of a loan or can prove a particular hardship.

If you no longer work for your employer that sponsored the 401(k) plan, then you can take a withdrawal, but it will cost you income taxes and a government penalty in addition to that — assuming you have not already reached the government's designated retirement age.

And if I am wrong and the government does succeed in some kind of direct confiscation, then you may not be able to get your money out at all — particularly if you still work for the employer sponsoring the plan. In this case, seeing warning signs won't do you any good if you can't take the money and run.

In addition to all of these negatives, many 401(k) plans offer very limited choices, sometimes with just a few mutual funds to choose from. The better plans have a greater choice of mutual funds.

But you won't likely have a plan where you can buy exchange traded funds and individual stocks. Our nanny society does not think you are mature enough to handle your own money the way you think it should be handled.

For all of these reasons, I am not a great fan of 401(k) plans. I recommend only contributing enough to get the employer match if you are going to contribute at all.

The less you have in a 401(k) account and the more you have diversified elsewhere, the less you have to worry about a government confiscation.

Until next time,

Geoffrey Pike for Wealth Daily

This Article Originally was Published here: http://www.wealthdaily.com/articles/will-the-government-take-your-401k/5016



Will the Government Take Your 401(k)? originally appeared in Wealth Daily. Wealth Daily, a free daily newsletter, offers practical investment analysis and contrarian stock market advice.
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