Nevin's Data "Points"

  "Unintended consequences" are often a euphemism for something bad. But not always. Take the 401(k), for example. While the nation turns its attention to Election Day, Nov. 6 happens to be the “birthday” of the 401(k). Well, kind of. It’s actually the anniversary of the day on which the Revenue Act of 1978 — which included a provision that became Internal Revenue Code (IRC) Section 401(k) — was  signed into law by then-President Jimmy Carter .  That wasn’t the “point” of the legislation of course — it was about tax cuts (some things never change). It reduced individual and corporate tax rates (pulling the top rate down to 46% from 48%), increased personal exemptions and standard deductions, made some adjustments to capital gains and created flexible spending accounts.  But it did, of course, also add Section 401(k) to the Internal Revenue Code. That said, so-called “cash or deferred arrangements” had already been around for a long time — basically predicated on the ...

An interesting—and somewhat counterintuitive—report came out last week, one that cast doubt on the “common wisdom” regarding Roth versus traditional pre-tax savings. The assumption underlying the research [i] was that those who had not yet paid taxes on their savings (the traditional pre-tax savings) would be hesitant to tap into those savings and trigger taxes, certainly more so that individuals that had already paid those taxes. Instead, the research suggested that the opposite occurred; that individuals who had saved on a pre-tax basis actually withdrew more/sooner—but with a twist.  This they hailed as good news. They noted that the research suggests investing in a CT (current-taxed, or Roth) plan could help ease concerns about outliving funds—because they spend at a lower rate (though they saw this as a negative for those who saved on a deferred tax (DT) basis).  They even managed to find a silver lining in the “cloud” of faster spending by the pre-tax c...

A research paper finds that introducing a Roth 401(k) option doesn’t have much impact on current plan savings rates — but what does that have to do with their preference for tax preferences? Well, according to “Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions,” governments could actually increase private savings by taxing savings up front, rather than in retirement. This conclusion basically suggests that taking away the current 401(k) pre-tax contribution and replacing it with a Roth assumption would not only not decrease, but it might actually increase , retirement savings, and with no additional cost to the government. For years a key education element touted about 401(k) plan participation has been the ability of the individual to put off paying taxes on their contributions and on the earnings attributable to those contributions (and those of their employer, if any) until retirement, at which point they would ostensibly find themselves in a...

Growing up, I remember late night television being broken up by commercials touting a series of interesting products, everything from a rod-and-reel contraption that would fit in your pocket to a special set of knives that would, apparently, slice through any substance in the known universe without ever being sharpened. But unlike the commercials that ran during prime time, having made the pitch, the announcer lead viewers through a series of additional product extensions, generally with the admonition, “but wait, there’s more…” Even with all that buildup, as the commercial closed viewers were reminded of the features of the product, and then asked, “Now, how much would you pay?” as several possible prices were suggested, then crossed off before being informed of the actual price (“plus shipping and handling”). And then, to close the deal, viewers were frequently told that they could have a SECOND version of the product for the same price (“just pay shipping and handling”). I’m hap...