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A recent Bloomberg Opinion piece said, "Your 401(k) will be gone in a decade," sounding off alarm bells in the MWK community. Is it true, and if so, what does it really entail?

Welcome back to #RichGirlRoundup, Money with Katie's weekly segment where Katie and MWK's Executive Producer Henah answer your burning money questions. Each month, we'll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

Reminder: This is not financial advice; we are not certified financial professionals—please do your own due diligence.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• The Ultimate Traditional vs. Roth Strategy

• Why Poverty Persists

• Cost of universal childcare, per Penn Wharton

• How to Pay N0 Taxes in Early Retirement

• How Underpaying Teachers Became the Norm

• Share your money stories at moneywithkatie@morningbrew.com

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Katie:

Welcome back, Rich Girls and Boys to Rich Girl Roundup, the weekly casual conversation version of The Money with Katie Show. I'm your host, Katie Gatti Tassin. Here's a quick message from our sponsors.

All right, onto the roundup Henah. We have a fun one today.

Henah:

Would we categorize this as fun?

Katie:

I think it's fun.

Henah:

This week's question came from Maria R. They said, I saw an article from Bloomberg Business that said 401(k)s will be gone in 10 years, tops. Is that clickbait or legit? And so this question actually came to me in my DMs. They saw it on Bloomberg's Instagram. They DMed me and they said, this is clickbait or do I have to be worried?

And my first kind of red flag, I was like, this seems very doomsday-y, like fearmongering. So I want to clarify that they definitely use the headline as the scary thing, but the author is essentially saying it's not that the money in your accounts will be gone in 10 years, but that they think that the plans like the tax-advantaged plan might be disappearing. But I'm curious, Katie, what did you think when you originally heard that headline without reading the piece?

Katie:

I had the same reaction of, oh, clickbait. People would be far more up in arms. This would not just be like, oh, by the way on Bloomberg, but when I read it, there was a paragraph from the article that — just as an aside — really jumped out at me because it stated something that is such a source of debate in the personal finance world, i.e., traditional versus Roth. It stated it so plainly and matter of factly: “Contributions made while working are not taxed, but participants pay taxes when they withdraw the money during retirement. Whether there is a big tax savings depends on the tax rate in retirement, which is usually lower because retirees tend to have lower earnings.” I was like L-O-L, LOL, the fact that it's just like, yeah, it's usually lower. I'm like, you read anything from the personal finance world and it's like, Roth, Roth, Roth, Roth, Roth, Roth, because your tax rate is going to be so high in retirement. I love it. They're like, yeah, it's probably not going to be.

Henah:

I did see that and I was like, ooh, a feather in Katie's cap — one point for traditional. So I mean part of it I was like, okay, they might know what they're talking about, but essentially what the piece argues is that the federal government is getting desperate for new sources of revenue. And so this could be the Hail Mary that they've wanted, which is…

Katie:

Have they tried stopping to go out for coffee?

Henah:

Have they tried eating all of their meals and not stepping foot into a restaurant if they can't afford to eat there?

They basically said eliminating the favorable tax treatment of the 401(k) is much less painful politically than increasing taxes directly. And I thought that that was interesting because when they talked about how big the plans are, but how much they add to the economy, I was like, this seems like a huge fuss for the middle class where this is one of the biggest benefits they have. And then the money that the government gets back is not all that much. It's a drop in the bucket for the US government budget.

Katie:

Oh, see, I actually felt the opposite way.

Henah:

Really?

Katie:

Yeah, because we've referenced this phenomenon and phenomena like it, the 401(k) plan savings in the Why Poverty Persists episode when we were going through how the tax breaks work, right? That providing tax breaks costs money.

So the $16,000 in taxes that my husband and I saved this year by contributing the maximum allowed amounts to our respective plans is now tax revenue that the government cannot use. So if you extrapolate that to an entire nation of people, the article says it costs about $185 billion per year, which is roughly 1% of GDP.

And the kicker though is that the higher your marginal tax rate, the higher your savings, which is something we always harp on the show of, if you're earning a lot of money, you get so much out of this, you'd be silly not to use it. But that basically means if I'm the person running the government balance sheet, if I'm the Excel monkey that's like, okay, who am I giving this benefit to and how much does it cost?

That means that the most highly paid Americans, the Americans who are in the 39% tax bracket are the ones who cost me the most to provide a tax break to. So I can kind of see there's a part of me that goes, is the best way to spend the lion's share of that money to give people like me a $16,000 tax break? Probably not.

You could pay for universal preschool three times over with that money, but at the same time, the middle class as a whole does use it and does benefit from it, but because it's all proportional to marginal tax rates, I think it would be interesting to see of that $185 billion, how much of those breaks are going to people who already earn over $200,000—$250,000 a year and what percentage of the money is going to people who are truly middle class versus upper middle or upper? Does that make sense?

Henah:

Yes, it makes sense. I think though what is interesting to me is that, yes, you saved your $16,000 this year perhaps, but eventually you will have to pay a tax bill.

So it's like the government is essentially deferring the money, so it's not like they're never getting it, but the government benefits from that in the sense that if you take your tax savings and invest it in the market and it gets a high rate of return, then you are also benefiting and having to pay taxes on that as well. So I feel like eventually they're getting their tax money either way.

Katie:

Totally. Because the quiet part is that the government will eventually, you will eventually have to pay them. They're not tax free.

So for example, you would think that the net cost should be something close to zero, right? They're losing $16K to the Tassin family this year, Thomas and I, but my parents are withdrawing money from their 401(k)s and paying taxes on it this year. So theoretically, shouldn't it all kind of come out in the wash eventually? If everyone's having to use it, you're going to be paying taxes on it eventually, and even if you pass it down, your heirs I think have 10 years to empty the account. So it's not like even dying resolves the issue for you. You will eventually have to do something with it.

Henah:

Is there an argument though, that people, because they make less in retirement, they're going to pay less in taxes, so over time they will not make as much money as if they just taxed it now?

Katie:

Yes. I think that that is a fair criticism, and that's where I'm wondering with the $185 billion, if they calculated that by just looking at overall tax breaks given this year or if that's the net effect, the net difference between Katie saved $5,000 on her taxes, but Mary spent $5,000 on withdrawing from her 401(k) in her sixties, and so the net effect is zero.

I doubt that that all went into play. I'm sure it was just what is the line item on the sheet this year for tax deferrals that people got from contributing to 401(k) plans? I think that's probably how they're calculating it.

But yeah, I think that that's fair to say, especially if you're following the hashtag patented how to pay taxes, how to pay zero taxes in early retirement strategy from Money with Katie, your favorite financial podcaster, then maybe you are paying $0 in taxes and leaving them in the dust.

But it's interesting that that's where they're going or where there are talks because the article also made a point of being like Republicans and Democrats alike are not about it, legislatively. My assumption is that Democrats are not about it because they think that it's just primarily benefiting the richer end of the middle class, which really isn't middle class at that point. You're talking about upper class people and the Republicans probably don't like it because…you know what? I bet it is because if we've raised the revenues from that place, then there's less deficit spending perhaps. But I don't know.

Henah:

There's something interesting to me about this whole conversation even happening because when we talked about this in the history of retirement accounts, we talked about retirement was paid through a pension and now the onus is on the individual, and that's when 401(k)s became big and then they were like, you can get the tax break. So if you basically cut out all incentives for pre-tax opportunities, what will people do?

Katie:

The article mentioned that they have looked to other countries to see how they do it there. They mentioned Denmark and how Denmark does not have tax-advantaged accounts. They don't let citizens get out of paying taxes on their income and that people just save for retirement in other ways. But I believe in those other countries, there are state-sponsored pensions similarly to how social security works. But I think more robustly, if I had to guess though, I have not confirmed that. So do your own due dil.

But I do wonder if that's why, because I think part of the argument is that, well, people will still save. We don't have to give them this tax incentive. A lot of people are not even aware of the tax incentive when they're saving. They're just doing it because their automatic payroll deductions, they're not actually sitting down and analyzing, oh, if I contribute this much, I'm going to get a direct tax savings. That's not really part of the equation for most people in saving for retirement. Now, I would assume it is the situation for our audience, but your general gen pop person is probably not thinking that way, is the argument.

Henah:

Right? But then the follow up I had though was that there are people who commented on the article and said, “So we may not have any pre-tax or tax advantaged accounts. We may not even have social security. We may not have Medicare in the next couple decades.”

So I think for people in Denmark or those other countries where they have much bigger social safety nets, it's less of an issue for how they're going to save. And now if you are truly middle class in the US and you take away all of those things, it feels nearly impossible to get there unless you really do start right at 22 and you've learned all the ins and outs of personal finance.

Katie:

Well, you’ve seen the conversations about increasing the retirement age to 70. They really want us out here working forever.

Henah:

Nope. I will be rioting like the French.

Katie:

I love the way the French riot. It is so just inspirational. Truly. The French people do protest like nobody else. You know what else was funny about this article? Quite the deep cut. When I was reading it, a certain name popped out at me.

Henah:

Ooh.

Katie:

I go, where have I seen that name before? Andrew Biggs. Good old Andy B. Same guy who we quoted in our Teacher Pay episode. He's the guy. Well, remember I made the joke about there's this one economist who was tied to every argument online that's trying to convince people.

Henah:

That guy!

Katie:

Yeah. It was just interesting because every single piece of content I found that was basically making the case that teachers are not underpaid. And actually if you compare them to similarly educated professionals working similar hours, they actually make more money. Everything came back to this Andrew Biggs guy, and this guy was quoted in this article and I was like, surely this is not the same guy it was. And he was basically just explaining how the incentive structure will change. But I just thought it was really funny. I was like, oh, Andy, spicy boy. We're back talking about 401(k) plans. I thought teachers was your beat.

Henah:

Small world for sources.

Katie:

Small world. I know. I know.

Henah:

Okay, so I'm curious, Katie, if you do think this would happen or if it were to happen, let's say, my question is do we all want to go ham the next couple years and see how much pre-tax investing we can sock away before things change?

Katie:

A hundred percent.

Henah:

Or, do we want to focus less because then they might hit us with the tax bill when they change it?

Katie:

I mean, I don't know that the future holds, but I would say that I'd lean more to the former. I think people would be up in arms. There would actually be people in the streets if they were like, okay, you have to now pay taxes on your entire four when, no, I think it would just be you can't make any more pre-tax contributions, pre-tax money that's already in there. You're good, but no mas. So I'm trying to get as much bang for that buck as I can, if you know what I'm saying.

And I also think that it's worth highlighting that because these benefits don't roll over. These are truly use it or lose it. So it's like if you're not taking advantage of them, it's not like down the road you can quote catch up. There are literal catch up contributions, but they pale in comparison to an entire lifetime of taking advantage of the tax breaks. So would definitely say..

Henah:

So what we’re saying is live mas.

Katie:

Use it

Henah:

Live more.

Katie:

And by live we mean use your 401(k).

Henah:

Save save, save the money. Yeah, live less. You know what I'm saying.

Okay. So crazy money story time.

Katie:

Let’s do it.

Henah:

If you have a wild money story that you would like us to share, we'll share it anonymously so you can email us at moneywithkatie@morningbrew.com.

Katie:

I really want more narrative oomph. I want more narrative potency in these stories. I feel like I'm getting sound bites and I want to be sucked in to the universe. Paint me a picture.

Henah:

I'm going to try. But I think the issue is people don't want the person in the story to be identifiable. So I'll throw that out there.

But this story is interesting to me. It came from someone named Jay. They said that their college father was arrested for tax evasion because they did not report $8 million of gambling profits, which was wild to me because as I've said on the show before, I'm nervous about misreporting $20 on my taxes, so $8 million. I'm like, wow.

So I asked what happened essentially because they were in college with this roommate. The roommate got a letter in the mail saying that her college tuition was not paid. Coincidentally, a month earlier, the father said, oh, I'm taking a leave from work. But he had always worked her entire life. She was like, that's already strange. And then it kind of all coalesced and they realized what was going on.

And so the father was eventually sentenced to, I think three to five years in prison, and they eventually got caught because of this gambling problem, and they hadn't reported their profits in two decades, like 20 plus years.

Katie:

Wait, they're gambling profits, you mean?

Henah:

Yeah.

Katie:

Okay.

Henah:

I would assume that at that point, it's kind of like an addiction, which obviously is quite hard and sad.

Katie:

But I mean… lucrative. If you've made 8 million bucks, I'm like, are we counting cards?

Henah:

Anyway, the kicker that I thought was so interesting is that the roommate still trusts him to do her taxes every year, and I was like, with that track record, I would not let you go anywhere near my taxes.

Katie:

Wait, is he an accountant?

Henah:

I don't know.

Katie:

Why is he doing her roommate's taxes?

Henah:

No, her roommate still trusts her dad.

Katie:

Oh, oh, oh, oh, oh, oh. The plot thickens. You know what? Back in the day before I got into personal finance and understood how taxes work, I probably would also be like, you know what? It's cool. I'll take my chances. That's how little I want to log into TurboTax now. I like doing it, but oh my gosh, that is wild.

If you've got a wild tale to tell, email us at moneywithkatie@morningbrew.com and we will obviously anonymously share them. And that's all for this week's Rich Girl Roundup. We will see you on Wednesday.