No, no, no. 401(k) tax benefits do not consist in being able to deduct the contributions from taxes, but in deferring the taxes. Published by Jane the Actuary View all posts by Jane the Actuary
4 thoughts on “Forbes post, “Journalists Are Still Getting Biden’s Tax Plan, And 401(k) Taxation In General, Wrong””
Your criticizing journalists and analysts for getting their scenarios wrong when the Joe Biden Tax plan is “Murky at best”! Bwaaaaaaa!
No. I am criticizing journalists/analysts for getting wrong their understanding about how current 401(k) taxation works, or explaining it poorly, if they do understand it.
Well, unless I totally misunderstand things, you make a glaring misstatement in the first sentence of your second paragraph that’s at least as bad as what you’re criticizing in the other articles. You state: “Remember: the two tax benefits of a traditional 401(k)/IRA are the fact that (1) investment earnings are not taxed and…”
It seems to me that those “investment earnings” ARE taxed, just later. Just like you said about Brock’s article: “The tax collector will indeed come for that money, just not now.” And Arend’s article: “[I had] hope that Arends would address the fact that the taxes are indeed paid at the back end, but no such luck.” Here’s what the IRS says on their 401(k) overview page (emphasis added): “Distributions, INCLUDING EARNINGS, are includible in taxable income at retirement.” Now again, maybe I’m just not understanding you, because you say “taxes on contributions are deferred in a manner that has the effect of eliminating taxes on those investment earnings” but (a) if that’s really true I think you don’t explain it well or (b) you’re wrong. If the IRS says your earnings are included in taxable income at retirement, I don’t see how you truly avoid all taxes on those earnings.
That’s where I referenced my prior articles on the topic. The “actuary-splainer” explains the math. The effect of deferring taxes until retirement is precisely the same as to not pay taxes on the investment earnings.
pretax contribution * investment growth factor * (1 – tax rate) is the same as
pretax contribution * (1 – tax rate) * investment growth factor.
All you’re doing is rearranging the terms.