Maybe I’m getting caught up in the awkward semantics of your question, but all of your payroll deductions literally happen at the same time.I think what you’re really asking is:Is the amount withheld for your 401k contributions subject to medicare and social security taxes?The answer is yes.In the example below, the medicare (1.45%) and social security (6.2%) taxes you pay is based upon your gross pay of $10,000, not your gross pay minus your 401k contributions (in this case, $7,000).
Social Security is old-age insurance. It is like auto or health insurance in which you get a payment to offset the cost of a trigger event. A 401K is a type of savings. That is something that you own.Insurance manages the cost of the unknown (old-age in the case of SS). Investments make money from taking risk. If you live to 100, the cost is horrific. Social Security doesn't pay the entire cost. It provides you a predictable stream of income to offset a part of the cost. This article looks how these different tools fit together : Going in the Wrong DirectionIt is critical of DC's idea that we can replace SS with more savings.
Could Donald trump cut off social security?
Social Security was not intended to be a persons sole means of income during retirement. A worker was still supposed to save for retirement and use SS as a supplement to that income. In the early days,there were more workers than retirees,so the trust fund grew quickly. The Congress started adding benefits that were not part of the original intent and they started borrowing money for the trust fund to pay for the nations bills and replaced the money with special interest bearing Treasury notes. Medicare was not part of the original SS Act either,it was created during the Johnson Admin. in 1966 (or there abouts). It was also supposed to be a supplement insurance plan during retirement. The benefits can be reduced,but it is a government obligation to the people of the US. 1 of the biggest problems is that Congress started allowing people who never paid into the system to draw benefits from the trust fund,thereby depleating the reserves faster. Workers today need to invest in other types of income producing sources like the stock market,401 (k) plans as well as the SS trust fund.
There is no “good” answer to this question because the tax laws around retirement investments are not rational. There are many couples that have a 401k (or 403b) AND an IRA. Most of these same people can also invest in other tax advantaged government programs like education savings accounts and HSAs. Business owners can open a Solo 401k, or a SEP. But there are a lot of people who either don’t work for a company that has a 401 or are not business owners. This group has the lowest limits of contribution. It makes no sense and definitely impacts the working class. Now, many of these people don’t have enough to fully fund an IRA, but many do. These are the very people that will be in real trouble in retirement. If you only have access to an IRA/ROTH IRA, it is very difficult to save enough over the course of a working career, to fully fund retirement. For these people (and many others) any reduction in Social Security will severely impact their quality of life in retirement. If you have fully funded your IRA/ROTH IRA, I would open a non-tax advantaged account at Vanguard or Fidelity and pile up as much money as you can, beyond your IRA.
Excellent Question.They have a saying they teach US medical students:“If you hear hoof beats outside your window, don’t assume it’s a Zebra.”In other words, if the patient has a cough and a fever, start planning to treat Bronchitis or Pneumonia, rather than Dengue Fever.This adage applies to Retirement Planning. In the US, people who’s income is higher in retirement (than it was in their prime working life) are about as common as Dengue Fever victims.It is far better to plan for the likely scenario {i.e., when your salary stops…. you will earn less money] that your tax bracket will be the same or lower.Yes, it is sometimes true that someone’s bracket could be higher in retirement because:Warren Buffet is your dadYou are an unusually disciplined saver and investor with a very high incomeYou built a successful company—or a real estate portfolio—that will continue to pay you an increasing stream of income when you stop workingI have had a couple of retired clients in this situation and they are acutely aware of how unusual they are and seldom complain about the taxes. In the words of one client, their situation falls under the heading: “Fancy problem to have.”Here’s another thing Retirees never say: “I wish I’d spent more time at the office and saved less for Retirement.”Here’s the real message: for every person lucky enough to have retirement tax issues, there are 1000 who have “didn’t-save-enough” issues. A tax-deferred (aka, tradtional) 401k’s main virtue is that it makes saving more affordable and better enforced.This is vital, because $600k is not as much as you think. If your lifestyle costs $60k today, it will cost $200k in 40 years. That’s what you are up against.Re: your direct question:Yes, for most people, the money they withdraw from their non-Roth retirement accounts (IRA , 401k, 403b) will be a lot (or most) of their taxable income, since Social Security is taxed at a lower rate, or not at all. And, yes, $100k will be taxed at a higher rate than $30k (but unlike income from salary, there is no tax for fica, unemployment, etc.)
What does 401k stand for?
According to dictionary.com, a 401k is: A retirement investment plan that allows an employee to put a percentage of earned wages into a tax-deferred investment account selected by the employer. But what exactly does that mean? It means that in 1978, our government decided that they needed to find something that would allow people to save for their retirement with a fairly high rate of return. What they may have known was that Social Security was fast becoming something that a retiree could not depend on solely. In 2000, the Social Security Administration announced that Social Security could only pay 40% of the amount needed for typical expenses (housing, food, other general expenses). This doesn’t include visits to the see the grandkids, or the cross-country Winnebago trip you’ve been planning for years. So, where do you get the other 60% to cover your expenses? What if I told you that if you invest $100/month into your 401k for the next 20 years, with a company match of 50%, you could save almost $180,000? On the other hand, if you contributed $100/month to a bank savings account for the same amount of time, you would save around $40,000. Investing in a 401k is simply the best way to save for retirement. According to the PSCA (Profit Sharing/401k Council of America), Americans have invested $1.5 trillion in 401k plans. Investing in a 401k not only sets money aside for retirement, but also allows for your employer to match your contribution and for professionals to manage it. The best part is that it comes directly out of your paycheck; you don’t have to remember to set that money aside. And since the money is removed from your paycheck before taxes, the withdrawal makes your take-home salary slightly lower, allowing you to be taxed on lower earnings, thus saving on taxes as well!
I'd really love to know where the OP got the 53% figure, since I have been unable to find it. I wonder if this figure includes:Workers who have pensions (mostly in the public sector) and don't really need a 401k. Federal, State, and Local governments employ many people and in certain sectors are the largest employer.Workers who have retirement plans that are not 401k. I have both a Roth 403b and a Roth IRA are those included in this number? For many 401k isn't even really a good option if it was available. Workers who have retirement accounts not with their employers. Both traditional and Roth IRA's are popular products for instance. Workers who have retirement programs via a Union instead of an employer.Worker who are unemployedThose attached to the military through current service or Veterans ServicesThose who are destituteWhenever I see numbers like 53% thrown around like its important my immediate response is "of what". Are we talking all citizens (included people already retired)? Are we talking about "eligible workers" and if so how is that defined? Bottom line: Good source or its poppycock.As for reform and as someone who saved for retirement even when I was in a low wage job there is one piece of reform I would love to see: The ability to get a tax credit for money placed in a retirement plan post tax. The draw of plans such as the 401k is that you can contribute pre-tax meaning that you could have up to 5% in many cases set aside without it affecting your take-home pay. Having pre-tax options from paychecks or at least a tax credit for contributions made to privately held accounts like an IRA would be a very worthwhile endeavor.