Federal budget could threaten 401K tax benefits

22News outlines one proposal that may not be very popular

investing

SPRINGFIELD, Mass. (WWLP) – With the budget deadline looming and the threat of a government shutdown, lawmakers are trying to come up with ideas to boost federal revenue before its too late.

Lawmakers are leaving open the possibility of taking away the tax-free incentive to invest in your 401K.

“You can work at a job for 5 years and not even know you have a 401K, or how much money is in your 401K. They more talk about taxes. A lot of people don’t even know what tax-free means when it comes to a 401K,” said William Goldsberry of West Springfield.

However, what it means matters, depending on how old you are, you can invest a maximum of between $18,000 and $24,000 annually in your 401K. The money goes in tax-free and gets deducted from your adjusted gross taxable income on your W-2 during tax season. Then the interest you earn, earns interest through compounding. An average return of 7% a year will double your money every 10 years.

Mark Teed with Raymond James Investments told 22News taking away tax-free is a disincentive. “I think it’s a horrible idea. The savings rate in this country is already bad enough. If you discourage people from doing it by not offering some sort of tax deferral, I think you might kill the golden goose,” said Teed.

401K’s can be especially beneficial if your employer matches a percentage of your contributions, but it’s not your only investment option. You can contribute between $5,500 and $6,500 annually to a ROTH IRA depending on your age. It has tax incentives too. The money is taxed before it goes in, so when you withdraw it, it’s tax-free.

“You want to be able to retire and feel comfortable. At this point, I can’t stop working. It’s like we are going to have to work until we literally go into the grave and it’s a very sad situations for us as Americans,” said Angela Peters of Springfield.

Most companies don’t offer a pension anymore, and with the future of social security uncertain, it’s important for younger Americans especially to invest early.

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