The Hidden Truth About 401k: From Tax Code to Retirement Risk

The 401k plan, a staple of American retirement savings, may not be as benevolent as it seems. Originally invented in 1978, the 401k was designed to help the ultra-wealthy reduce their taxable liabilities. This transition from traditional pensions to 401k plans has significantly shifted the financial risk from employers to employees, leaving many to grapple with the tax burdens during retirement.

One user commented, "Imagine living in a society that does anything at all to take care of you or even just lets up on the exploitation long enough for you to catch your breath." This sentiment echoes a broader discontent with how the 401k's dependency on the stock market benefits the wealthy. Another user pointed out, "401(k) is dependent on the stock market AKA rich people's yacht money. It aligns the working class retirement interests directly to wealthy people making millions in dividends on investments each year."

The transition from pensions to 401k plans wasn't without drawbacks. As noted, "Pensions also have drawbacks, they tie you to a specific employer. If you quit or get fired before working at a place long enough, zero retirement for you." Additionally, traditional pensions were already invested in the stock market, meaning 401ks didn't completely change the landscape but rather shifted some burdens. Another user emphasized, "Social security is the best system because it doesn't tie you to employers, it's guaranteed regardless of the market, and no tax shenanigans."

A historical perspective reveals that a significant number of private workers were once covered by defined benefit plans. However, changing retirement regulations led to the rise of 401k plans, which only provide a fraction of what was previously offered. One user lamented, "We went from 50-60% of people covered by defined benefit plans to cheapskate contributions plans."

The conversation also touched on the taxation aspect, with one user explaining, "Pension income is generally taxable too in retirement… you’re going to pay taxes either coming or going." The assumption with 401k is that individuals benefit more from the tax deduction while working, as they would be in a lower tax bracket during retirement. However, the ever-growing national debt could mean higher taxes in the future, complicating this assumption.

Bankruptcy and insolvency of companies pose another risk to pensions, as highlighted by a user who stated, "I've seen all kinds of pensions get affected when the company became insolvent." This has led some to argue that despite its flaws, the 401k is still better than nothing and, for some, better than the Roth IRA.

The introduction of the FICO credit score in 1989, which became widely used by 1995, was compared to the 401k in terms of its relatively recent history and potential for change. One commenter remarked, "It's not like it's something spanning several generations - we can get rid of that anytime."

Despite the criticisms, some users see the 401k plan as a necessary evil. "401k is still better than nothing and for some better than the Roth IRA," one user noted. Meanwhile, another user praised Roth IRAs for their post-tax contributions and no penalties for early withdrawal, offering a different approach to retirement savings.

The 401k plan, while providing a viable retirement savings option, comes with its set of challenges and risks. From its inception as a tax code to its current role in retirement planning, understanding the full implications of a 401k is crucial for those looking to secure their financial future.