The Elusive Truth about the Still Amazing 401(k)

Republican proposals to limit pre-tax contributions to employer sponsored 401(k) plans have been short on detail so far and, due in part to the complexity of tax rules, long on misunderstanding.

The annual limit on tax-advantaged contributions to an employer sponsored plan 401(k) (assuming you are under age 50) is $18,000 in 2017. This limit is unlikely to go down as a result of the Republican tax proposal, despite what you may read about a drop to $2,400.

That's because the $18,000 is comprised of two types of contributions - regular pre-tax 401(k) contributions and so-called "Roth" after-tax contributions to a 401(k) plan. Under current law, you decide how much of the $18,000 limit you contribute to regular pre-tax 401(k) and how much you contribute to a Roth 401(k). Many employers have not made the Roth after-tax feature available to their employees, so many people, even financial writers seem to be unaware of it.

The author of this Washington Post article seems to be unaware of the distinction, not even mentioning Roth.

Don't confuse the "Roth" 401(k) that an employer sponsors with the "Roth" IRA that has been around a lot longer. You set up your own Roth IRA, not your employer and the dollar limit on contributions to a Roth IRA is only $5,500.

So, back to the tax proposal - it's really just a matter of Uncle Sam saying "Pay me now or pay me later."

There are important differences, which we's get to, but some people will be better off with the change.

If your tax rate when you retire is the same as the tax rate in the year that you saved, then there is no difference between the pre-tax 401(k) and a Roth 401(k).

For example, suppose I want to set aside $1,000 today in a pre-tax 401(k) account that earns interest for 15 years at 6% per year and my tax rate is 20%. My $1,000 account would grow to $2,400. After paying taxes of $480,  I would have $1,920 left to spend after withdrawal.

Now suppose instead that instead of putting all of that $1,000 in a regular pre-tax 401(k), I pay taxes at 20% today on that $1,000 which leaves me with $800 after taxes to put in a Roth. What happens? You guessed it - the $800 in the Roth account grows at the same 6% per year to $1,920 which is tax free.

For a lot of people, the Republican tax proposal has no impact on retirement saving!

But the real story is more complicated.

If you expect your tax rates to be lower in retirement, then you are better off in the pre-tax 401(k), not the Roth. If tax rates increase for everybody due to future tax law changes, then now is a good time to save more in the Roth.

And there is one more impact no one seems to talk about. Those who are financially well off and  looking for an upper hand on taxes are better off with the Roth. Why? Suppose a wealthy individual is in a 35% tax bracket both  this year and in retirement and saves $18,000 in a pretax 401(k) account that grows to $100,000 at retirement, is withdrawn and taxed at 35%, leaving $65,000 in spending money.

That same person could set aside $27,700 of salary today by paying taxes of $9,700 (35% of $27,700) and put the remaining $18,000 in a Roth 401(k) that grows to $100,000 at retirement in the same year as the previous example - but pay no taxes on the $100,000!

So, for anyone who is hitting the tax law limits on saving, changing to a Roth contribution has the same impact as increasing the tax law limits.

None of this highly technical analysis touches on the real life impact that could discourage saving by lower paid workers if this $2,400 limit is made law. But that story is more complicated than it sounds. Most 401(k) plans have automatic enrollment features these days. Low paid employees contributing by automatic enrollment to a 401(k) are not likely to change their minds and take action to stop making Roth contributions. And they might even end up contributing more effectively for retirement if they have saved the same dollar amount after tax that they would have pre-tax, but their Roth account is not taxed when it is withdrawn at retirement.

That's the story from the worker's perspective. If you are well off, this change is not necessarily bad. If you are low paid, it's probably not bad because automatic enrollment will keep you saving for retirement. But from the perspective of the country, this proposal increases tax revenues today by removing future sources of  tax revenue.  This is yet another Republican tax policy slight of hand - eliminate the estate tax and reduce corporate taxes, offset those tax revenue reductions with a measure that increases current tax receipts, but blow up the deficit in the future. Let's forget about tomorrow cuz tomorrow never comes.

Ironically, DJT may have been told something about the 401(k) proposal that prompted the Oct. 23 tweet
"There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!"

As tweets go, that may not be far off the mark. But we will never know, will we?

More

The Party of Lincoln is Now the Party of Trump

Thomas Edsall has thoughtful piece "The Party of Lincoln is Now the Party of Trump" in the NYT today about the extent to which the Republican Party of today is losing its moorings. But his argument fall short in one important sense.

As I comment in the NYT editor's picks:

"The statement that 'Democrats are hardly exempt from tribalism' misses the larger point. No prominent Republican has stepped forward to repudiate Trump unless they are a former officeholder, current officeholder who has decided not to run for re-election, or member of the conservative pundit class. If you are a Republican Senator or Representative who is not running for reelection, then you are not a "GOP pol who stands up to Trump", Nolan McCarty and Ryan Enos notwithstanding. Standing up means putting yourself on the line."

Unfortunately, waiting for a Republican officeholder in the Senate or House to step forward feels like a doomed exercise. The fact that no one has taken this step is evidence of a consensus political calculation - that there is only downside to being the first and potentially only Republican to take such a risk.

From Bush to Trump to What?

As noted previously here and by others, Trump is not an aberration. The Trump phenomenon is the result of a natural progression of corrosive Republican party tactic over recent decades. The Bushes in particular embraced extreme tactics in political campaigns. George H.W. Bush was expert at the pivot from divisive campaign tactics to more normal behavior as president. George W. Bush carried tactical politics to an extreme in both campaigns and governing. Rich Benjamin has a pretty good rundown in the allotted space today in WaPo: George W. Bush is not part of the Resistance. He's part of what brought us Trump.

Benjamin's piece is mostly spot on, but the ending is a bit off; "Americans may like to forget history. But this year is showing us in real time that we are, indeed, doomed to repeat it."

Actually, we are not repeating history. We are experiencing the natural progression of history that happens when tactics employed to win become more important than any other consideration - like survival of the republic.

The Trump phenomenon is more extreme than the Bush phenomenon ever was. Anything bad about Bush is taken to a never-before experienced extreme with Trump. With Trump, literally no one knows where this goes. If the current Republican Congress continues to support Trump, everything has to get worse before it gets better.

When Will They Ever Learn

The New York Times continues to perpetuate the myth that the search for truth requires a balancing of a so-called right, a so-called left, and a center that is somehow between those two poles. No wonder we are so "polarized".

The NYT, always above the fray that envelops the rest of us poor folks, has a recent installment of their We report on Right, Left, Center - You Decide (my words, not theirs) on the Right and Left React to Trump's Condolence Call Controversy. 

But the question from the press in the Rose Garden a few days ago was not - "Why haven't you called the families?". The question was "Why haven't we heard anything from you so far about the Soldiers that were killed in Niger? And what do you have to say about that?" It was the president who chose to place this in a context of condolences, invoking Obama,  that presses the hot buttons of the military families, which conveniently diverted away from sensitive issues of his policies and military tactics to execute those policies.

For example, most people had no idea we have ongoing military operations in that part of the world. As we learn about this special forces operation, the soldiers were leaving a meeting and the ambush seems to have been a trap, so they may have been betrayed.

What does that say about intelligence in that part of the world? 

We know that Chad announced an end to cooperation with the U.S. military in the fight against Boko Haram immediately following Chad being placed on the list of countries subject to the Trump administration travel ban. And that move against Chad seems to have been based on Chad missing the deadline for submission of passport documents to the U.S. for a security review.

How does that make us feel about the use of military contractors?

How does that make us feel about an arbitrary travel ban and other arbitrary decisions?

Many valid questions remain about the circumstances of the final hours and death of Sgt. La David Johnson,  the role played by government contractors and French forces. All of these factors call for serious discussion of policy. Instead, we find ourselves drawn to the basically irrelevant hot button issue of appropriateness of condolences and appropriateness of discussion of appropriateness of condolences. On that terrain, serious debate about policy can not survive. It can not even exist. And that's the goal of  DJT. Trump's instinct to sidetrack serious debate about policy wins the day yet again.

Had this been the Democrats, we know what would have happened because it did happen.

Benghazi, Benghazi, Benghazi.

The New York Times editors with their right/left/center balance are still clueless about context. Just like during the campaign of 2016 and just as he has done all this year, Trump defines the subject to be debated. The story becomes what he says when the story should be about what he is doing. Trump instinctively kicks the story to campaign mode, but he is the president and the press needs to cover the actions and inactions of his campaign, not the daily bob and weave of tweets and invocation of Obama and Clinton, neither of whom is in government.

Trump controls the news cycle, moving it from the NFL players who kneel during the national anthem to the condolences for fallen soldiers. Once again, Trump wins by diverting attention.

When will the New York Times ever learn?

Janet Yellen Really?

President Trump is scheduled to meet today to interview Janet Yellen for renomination as Chair of the Federal Reserve. Article after article about the five leading candidates treats Yellen as a viable nominee, including the New York Times treatment "The Economy is Humming, But That May Not Win Janet Yellen Another Term" . That piece looks at pros and cons Trump may be considering. "Presidents in recent decades have generally decided to reappoint Fed chairmen, even from the opposing political party, on the theory that stability would comfort markets." reports the Times, which emphasizes the historical perspective, going back to Volker's chairmanship.

source: dailytelegraph

But Janet Yellen was appointed by one President Barack Obama and confirmed in 2014. Her chance of being nominated by Trump to remain in her post is 0.00% because Trump has signaled clearly in action after action as president that he wants more than anything to undo every action that Obama took while in office.

Yellen's chances are similar to Romney's chances of nomination to a post in the current administration following his visceral denunciation of Trump during the 2016 campaign. Romney had no chance when he met with the president-elect in Trump Tower a year ago. Zilch. Zip. Nada.

The basic irrationality and antagonistic posturing of Trump is intrinsically a key component of his decision making process that should not be ignored by news organizations who continue to pivot to a normalcy perspective on Trump - "No matter what he does, we need to report on every issue as if he might be normal this time, rather than consistent with his prior practice."

This would be a good time to abandon that practice once and for all.

Chris Hayes and Hillary Clinton had an interesting moment during yesterday's interview. Hayes asked Clinton whether (to paraphrase) she believed that she lost votes because Trump and Republicans had signaled that they would create scandal after scandal to bring her down as President, so that a vote for Clinton was a vote for endless scandals, even if constant investigations were not merited.

Clinton immediately responded, basically -- No, no. Her example was that Trent Lott vigorously opposed her as a prospective Senator, but after her term in the Senate, admitted that he had found her to be someone he could work with on legislation. So, the argument goes, she would be able to overcome scorched earth tactics.

These two viewpoints are not incompatible. Clinton may well have lost the votes of potential supporters who could not bear the prospect of ginned up 'scandals' throughout her presidency, as we have suggested in This Is Gonna Hurt You More Than It Hurts Me.

Chris Hayes' point may be correct. And Clinton may be correct that the efforts to make her presidency a failure as the primary goal may well have fallen short. But that would not have been for a lack of trying. It could be that after eight years of constant obstruction for obstruction's sake with Obama as president, Republicans in Congress could have been faced with an electorate that eventually caught on to their shenanigans over the next four to eight years. And who knows. The current political environment under Trump may be just what is needed for the Republican political gamesmanship to be recognized for what it is - unless the Republican tactics get lost in scandals of money laundering, collaboration with Russian spy agencies, and blackmail. In that case, Republicans would argue that Trump was an aberration, instead of the apotheosis of Republican strategy in politics over the past three decades.

Becoming Rational

James Hohmann (with Breanne Deppisch and Joanie Greve) contributes mightily to public dissection of the Trump phenomenon in The Daily 202: Why the divider in chief embraces culture wars.

Finally an article that shines the spotlight on the tools employed by Trump (and other traffickers of logical fallacies.)

"Trump ... has long been a builder of straw men...his chaotic approach to governing also depends on constantly presenting the American people with false binary choices."

Hohmann continues with a description of the recent week of Trump attacks on mostly black NFL players:  "Trump talks about the world in black-and-white terms: You’re either with him or against him."

That is actually two salient points in one sentence. As a black and white thinker, Trump's style appeals to black white thinking - never mind that we live in a world of shades of gray. And Trump has built his own world as dependent on unquestioning loyalty. If you are not loyal, you are fired.

After that, the key points continue to be made in bold:
"He is also looking for distractions." (Distractions divert attention from his incompetence and corruption."
"This is part of a pattern." (No kidding. Of course, this was the pattern last year too, but as a candidate, Trump was judged by mainstream media under the rule that if journalists observe a pattern of misbehavior, they must report using the rules of fair and balance - only the opponent of the candidate can make the observation of a pattern of misbehavior. Otherwise, the journalist is being 'biased'. Which is exactly how Trump got away with the misbehavior by being the more aggressive attacker. Observation of patterns of behavior is an important element of accurate factual reporting in context. Without a journalist's noting the pattern, the context is lost and we are left with competing "facts" in support of alternative narratives and no reliable method to discern truth from fiction.)

"Facing blowback over his false moral equivalency after the violence in Charlottesville, Trump embraced the cause of preserving historical statues." The piece continues with  "Employing the fallacy of the slippery slope, Trump warned that George Washington and Thomas Jefferson statues would come down next if statues to Stonewall Jackson are taken down."

So the authors take two more shots at the irrationality of faulty logic with "false moral equivalency" and the proverbial "slippery slope". If you don't have a credible argument against your opponent's position, argue against the supposed outcome.

"Picking fights with people like Kaepernick is Trump’s modus operandi. He thrives on feuds, and he likes setting up binary contrasts between himself and others." There you have it again - the world in black and white. No shades of gray.

"A similar dynamic was at play when Trump attacked the Broadway musical “Hamilton” last November after the cast read a statement to Mike Pence celebrating diversity"

The piece continues with other great insights and surmises that this could be Trump's  Army vs. McCarthy moment. Maybe, but not likely. For Trump is still controlling the narrative. He shines the spotlight where he wants it and will deflect away from the NFL at a moment's notice. Only when the mainstream media fails to take the bait of the daily tweetstorm will the distractions lose their power. Unfortunately, that result may require dramatic legal action by Mueller and his team.

The Washington Post has done a better job of producing insights on Trump (and Republicans) trafficking in logical fallacies. A significant portion of mainstream outlets, including much (but not all) of the New York Times reporting misses the purely tactical nature of the Trump posture.

One hopes that WaPo and other mainstream outlets will double down on their new rationality so much that whenever a politician says, for example,  "Obamacare is a disaster" (which Republicans use as their go to line about health care reform,) those politicians will be called out on the logical fallacy of invoking a frame --hating Obama -- while evading serious discussion of the issues.

And, more than anything else, we need the next election year to be marked by new journalism that recognizes patterns of behavior and reports on real context - context established by observation of clear patterns of behavior rather than he said/she said reporting without context. The true test for journalists will come when the current mode of speaking truth to power with Republicans having taken over all three branches of government and most state houses is replaced by the rules of campaign reporting.