The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 17. What the Government Wants

WHY DOES THE GOVERNMENT always get involved in these stories? For a couple of reasons. First, the government loses billions of dollars in taxes each year because the dollars deposited into 401(k) plans have not yet been taxed. When tax reformers limited the availability of IRAs in the Tax Reform Act of 1986, they raised tax revenues by closing what some lawmakers viewed as a loophole for the "rich."

The second reason is an obvious one: Whenever Congress looks for a way to raise revenue, tax-deferred investments and tax-free investments get a close examination. That's what happened in 2009 as the Obama Administration looked for ways to solve the economy's collapse and raise revenue for the new programs it hoped to start. As Congress casts about looking for more tax revenue, nothing is sacred. There was buzz in early 2009 about eliminating, or seriously reducing, tax advantages for 401(k) plans. Most experts believe that's history now. The 401(k) plan, like the tax deduction for interest paid on a mortgage for a primary residence, has strong support from middle-class Americans. "They can tinker with the edges, but the 401(k) plan is here to stay," says Kyle Brown, counsel for retirement at Watson Wyatt in Washington.

Still, the Internal Revenue Service (IRS) keeps a close eye on how the plans are set up and maintained to make sure no additional taxes are lost. And Congress makes rules on when and how the money is withdrawn so that the government ...