US tax code blamed as wealthy see major retirement account gains | Hacker News Reader

US tax code blamed as wealthy see major retirement account gains

commondreams.org

12 pointsPaulHoule16 comments

Seems like the rich are able to save more for retirement than the poor, and will use the most effective means to do so.

Contribution limits to retirement plans mean that for a billionaire, their 401k or IRA balance is very unlikely to be a significant portion of their portfolio. The typical case I can imagine for this would be putting their roughly $20,000 worth of 401k contributions into company stock every year and then seeing their company go 100x.

See this case study:

https://www.propublica.org/article/lord-of-the-roths-how-tec...

Peter Thiel managed to get a $5 billion IRA.

A $5 Billion Roth IRA! Implying tax free withdrawals.

That trick may be illegal though.

I'm still not sure how buying stock in your own company isn't a Prohibited Transaction.

> [1]Prohibited transactions in a qualified plan

> 4. Any of the following acts between the plan and a disqualified person:

> [1] Disqualified person. You are a disqualified person if you are any of the following.

> 8. An officer, a director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder, or a highly compensated employee (earning 10%-or-more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7).

[1]: https://www.irs.gov/publications/p560#en_US_2022_publink1000...

It is, but as we have witnessed for decades, and intensely more so in recent years, the application of the law is inversely proportional to the wealth of the defendant.

If middle-class people don't have any savings, taxation is the least of our problems.

To say that 401k accounts are subsidized is a lie. The deal is that all contributions aren't taxed, but all withdrawals are, and if you withdraw before you're 59.5, there is a penalty with the tax. Assuming that all the money in every 401k is withdrawn, it will all be taxed eventually. (Or is that a bad assumption?)

So shut up Bernie, your tax dinner is coming.

If there weren't actually tax benefits to using 401ks and IRAs, people wouldn't use them. So let's assume the rich people who use them are in fact intelligent and optimizing their savings for minimal tax.

Then the fact that those benefits go disproportionately to the wealthy, is in fact a case of tax benefits going to the wealthy. You can argue that this is fine or expected (people with more money are going to have more money in their savings accounts, duh). But it's true.

unless they just put a cap on it. like $3 million or something. problem is I've seen 401ks get adjusted so they work for the CEO. like a 100% match on the first 1% then 50% after that. or some other craziness.

because 1% of a 1.5M salary is enough the max 401k. so why shouldn't CEO adjust the plan so it saves them like $6K. geez...greed much...

People wealthy enough to utilize retirement accounts are also likely to be paying higher tax rates in general, though.

Higher nominal taxes rates don’t translate directly to higher effective tax rates.

Taxation isn’t a binary event.

Following your line of reasoning, no one should complain if 401k withdrawals are taxed at a .000001% rate, because hey, they are “taxed”.

The point is that retirement accounts get better tax treatment (which is the the clear stated goal of the accounts) and most of the value is delivered to people who are already better off in society, it isn’t giving the disadvantaged a leg up. Or at least, that is the argument.

First, let’s not call this a subsidy. It is not; it is a tax expenditure. A subsidy intends to increase the supply of a good, and I doubt “millionaires” qualifies as a good so we will set that word aside.

401k capital gains are taxed. That’s one expenditure.

The other expenditure is that the contributions aren’t taxed at the taxpayer’s marginal rate at the time of contribution, they are taxed at the taxpayer’s (presumably lower) marginal rate when he is retired.

The total tax expenditure is the sum of the cap gains not collected plus the difference in income tax collected, plus the time value of money to cover the delay between tax free deposit and taxed withdrawal, adjusted by some externality such as the tax revenue from alternate saving methodologies.

So yes, eventually, the fisc will see its tax revenue. The only problem is that the revenue will be diminished by the delta in marginal rates, the missing cap gains, and delayed by half the average length of a taxpayer’s career.

Hemel complains that "...the top 10th of households reap a larger share of the income tax subsidy for retirement savings than the bottom 80%."

He fails to mention that the top 10% of households pay 70% of all federal income tax.

I think probably more importantly, there are relatively big jumps between the 90-99% and the top 1 to 0.1% in terms of income. If you're inside that top 10% as many software developers and IT professionals are, it's clearly an upper-middle class lifestyle. Especially if you didn't come from an upper class or upper-middle class home.

Not everyone moving between the 90-99% bracket stays there, and will vary as you approach retirement age. Maybe a cap on IRA value allowed to be held tax-free at a multiplier of minimum wage? Like 25x the annual pay of a full time (40hr-week) minimum wage employee for the state you live in? So if min-wage is $12/hr in your state, you can save/invest up to around 600k or so tax free. The excess to that is then taxed at trade, divestment or death.

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