IN 401(K), EMPLOYERS REALLY CONTRIBUTE TO THE IRS
May 29, 2007
Our lawmakers have decided to take the money your employer contributes to your 401(k) plan today and transfer most or even all of it to the federal government during your retirement years, says economic columnist Scott Burns.
Average-earning workers who are about 50 years old today can expect to pay income taxes on their Social Security benefits from Day One. Workers who are younger than 50 can expect the same result even if their incomes are lower than average. There are potentially four levels of taxation 401(k) savings will face:
- At this level, no Social Security benefits are taxed.
- Assuming a 15 percent tax rate on the 401(k) income, 85 cents of each 401(k) dollar will go to the employee and 15 cents to the IRS.
- That's a reasonable deal that's rapidly disappearing.
- At this level, 50 cents of Social Security benefits are taxed for each dollar withdrawn from the 401(k).
- In effect, 77.5 cents of each dollar from the 401(k) will go to the employee and 22.5 cents will go to the IRS.
- About two-thirds of the employer contribution goes straight to the IRS.
- Here, 85 cents of Social Security benefits are taxed for each 401(k) dollar withdrawn, and the basic tax rate is 15 percent.
- So 72.25 cents of each 401(k) dollar goes to the employee and 27.75 cents of each dollar goes to the IRS.
- About 84 percent of the employer contribution goes to the IRS.
- As in Level 3, 85 cents of Social Security benefits are taxed for each 401(k) dollar withdrawn, but the basic tax rate is 25 percent.
- As a consequence, 53.75 cents of each dollar goes to the employee and 46.25 cents goes to the IRS.
- In effect, the entire employer contribution (33 cents) plus 13.25 cents of the employee contribution goes to the IRS.
Source: Scott Burns, "In 401(k), employers really contribute to the IRS," Dallas Morning News, May 29, 2007.
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