4 ms·

The issue with the 401k is that it is essentially an anti-progressive tax. It is there as a way for the government to encourage and subsidize retirement savings

The issue with the 401k is that it is essentially an anti-progressive tax. It is there as a way for the government to encourage and subsidize retirement savings; but it does so by providing a 1:1 deduction on taxable income (with a choice of taking the deduction now or during retirement). This means that you get a greater benefit (read subsidy) if you are at a higher tax bracket; even if you are looking at the benefit in percentage terms instead of absolute. If you don't pay income tax, you get no benefit from a 401k. We can go a long way to solving this by just making the subsidy a flat refundable tax credit. If we wanted to make it progressive, we could to the inverse of progressive income tax: by making the first $X get you a Y% credit, with a decreasing credit as you go up in contribution brackets.

bradleyjg 5y ago
The savers tax credit is similar to what you are proposing. https://www.investopedia.com/articles/retirement/04/031704.asp https://www.investopedia.com/articles/retirement/04/031704.a...
clairity 5y ago
yah, 401(k)'s are financially engineered to seem to be for the masses, but they're really designed to advantage high-earners even more. i'd actually prefer to remove the tax advantage altogether (and plow that into an overall more progressive tax structure), but absent that, a credit phase-out would be better than what we have.
OldHand2018 5y ago
> If you don't pay income tax, you get no benefit from a 401k. Aside from the fact that the money you manage to put into it will still be there (with very high probability). But, you do know that employers are allowed to offer “Roth 401k” plans too, right?. If you pay little to no income tax now, they are fantastic.