Can the Government Take Your 401k?

Government

Published: June 22, 2022

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With inflation on the rise and a new global crisis popping up every 12 months, it’s no surprise many Americans are concerned about the security of their financial futures. With constant economic uncertainty, many Americans are worried about whether or not the government can take their 401(k).

While it may seem like a far-fetched scenario, it’s not entirely unprecedented. For example, In 2012, the Irish government placed a 0.6% levy on all assets held in private pensions for four years to increase government revenues. They did this to combat a larger financial crisis.

But could something like this ever happen in the United States? In this article, we’ll explain whether or not the government has the right to take your 401(k) and what you can do to protect your retirement savings.

What is a 401(k)?

A 401(k) is a retirement savings account that an employer sponsors. Employees can contribute to their 401(k) pre-tax, and the employer typically matches these contributions.

Typically, a small amount of each paycheck will be paid into an investment account. Depending on the agreement, the employer will then match part or all of that investment. It’s then up to the employee’s discretion where those funds are invested; however, the most common investment is in mutual funds.

The money you contribute to your 401(k) reduces your taxable income, and the earnings on your investments grow tax-deferred. This means that you won’t owe any taxes on the growth of your investments until you withdraw the money from your account.

While something like this has not happened in the United States, there have been rumblings that the Biden Administration may be planning something, which raises the question – are 401(k)s and other retirement plans in the US at risk?

Can The Government Seize My Retirement Savings?

Unfortunately, the simple answer is yes. However, Congress would first have to pass new laws allowing this to happen.

It would be difficult to pass a law allowing the government to seize your entire retirement account for no reason. However, several bills have been introduced to Congress over the past ten years designed to generate revenue for the government by finding new ways to tax retirement accounts.

Change Minimum Distributions

Currently, original Roth IRA and Roth 401(k) owners are not required to take minimum distributions. This means they could if they let the money sit in their account untaxed for the entirety of their lives.

However, in 2019 there was a proposal to the SECURE act that would end this benefit and begin requiring minimum distributions for the Roth IRA and 401(k).

A change in this law would mean that you would need to begin taking distributions from your 401(k) at a certain age, whether you need them or not. The government would generate tax revenue each time you take a distribution.

Limit Total Account Balance

Another recently floated tactic is limiting the total amount you can hold in a 401(k). This would mean that once your account hit a specific number, you would no longer be able to continue making contributions.

If you can no longer contribute to your retirement account, your income taxes would be based on considerably more income than in previous years. So while this would not be directly taking money from your 401(k), the government is still finding ways to take more money from you through taxes.

Reduce Maximum Contributions

The government could also generate more revenue through taxes by reducing the maximum contribution allowed, reducing the benefit that higher-income taxpayers receive.

In fact, Biden has already tried to introduce a version of this by providing a tax credit instead of a tax deduction or deferral! In this situation, the credit would be based on a 22% tax rate, which would still negatively impact the tax benefits that higher-income taxpayers would receive.

Who Else Could Potentially Take Your 401(k)

The Federal Government may not be the only one you need to worry about when it comes to keeping your retirement account secure. There are a few other scenarios where your retirement savings may be vulnerable.

Your 401(k) Is Safe From Commercial Creditors

If you’re worried about creditors coming after your 401(k) to pay down your debts, you can rest assured that this won’t happen. This includes commercial creditors, credit card companies, landlords, and government entities.

The only exception to this rule is, of course, The IRS. If you have an outstanding tax debt, the IRS can garnish your 401(k) to pay off your back taxes.

However, even if the IRS does garnish your 401(k) to pay off your taxes, there are limits on how much they can take. The IRS can only garnish up to the lesser of $25,000 or 25% of your account balance. So, even if you owe a significant tax debt, the IRS is unlikely to seize your entire account.

Independent 401(k) Can Be Seized in Bankruptcy

While your 401(k) assets are usually safe from creditors, there is one exception: independent 401(k)s. Independent 401(k)s are not sponsored by an employer and are not subject to the same protections.

If you have an independent 401(k), it can be seized in bankruptcy. This is because independent 401(k)s are considered assets that can be used to pay off your debts.

However, even if your independent 401(k) can be seized in bankruptcy, there are limits on how much of your account the trustee can take. The trustee can only take up to the lesser of $750 or 50% of your account balance. So, even with a large debt load, the trustee is unlikely to take all your 401(k) assets.

The Federal Government Can Garnish Your 401(k)

We’ve already discussed how the IRS can garnish your 401(k) to pay off back taxes; however, it’s important to note that the IRS is not the only government entity that can garnish your 401(k).

If you owe child support or student loans, the federal government can garnish your 401(k) assets to satisfy these debts. The amount that can be taken from your account depends on the type of debt you owe. For example, if you owe student loans, the government can only take up to 15% of your account balance.

Alimony Can Be Taken From Your 401(k)

In addition to taxes and student loans, alimony can also be taken from your 401(k). If you are ordered to pay alimony and fail to do so, the court can garnish your 401(k) assets to satisfy this debt.

The amount that can be taken from your account depends on the state you live in. In some states, the court can only garnish up to 50% of your account balance. However, the court can garnish up to 100% of your account balance in other states.

Investing In Gold As A Retirement Strategy

If you’re concerned about how the government may change the laws to steal from your retirement savings, you might consider investing in gold and other precious metals as a retirement strategy. While investing in physical gold can have similar benefits to a 401(k), several differences make it more secure.

Physical gold is not subject to the same rules as employer-sponsored retirement plans. This means that creditors cannot seize your gold, even if you file for bankruptcy. Gold is also not subject to government confiscation to pay your outstanding taxes or child support.

Gold is also an excellent hedge against inflation. Typically, as the dollar loses its value or people lose confidence in it, the value of gold will rise.

Different Ways To Invest in Gold

Investors like gold for various reasons, primarily because of its utility as a hedge against securities like stocks and bonds.  While many people like owning physical gold, there are several alternative ways to increase your exposure to gold.

Gold Bullion

The traditional way of investing in gold is by buying physical gold bullion, i.e., gold bars or coins.

Gold bars are a very popular option as they are available in a wide range of weights. For example, you can purchase gold bars as small as 2.5 grams or up to as large as 1 kilogram on Noble Gold Investments.

Regarding gold coins, the most common investment is the American Gold Eagle, which comes in denominations of 1/10 ounce, 1/4 ounce, 1/2 ounce, and 1 ounce. Several other options are also available from different mints worldwide, like Australian Gold Kangaroo Coins.

Gold Futures

Gold futures are exchange-traded contracts where the buyer agrees to take delivery of a specific quantity of gold at a specific price on a future date. The gold futures market allows companies to hedge their gold price risk on a future purchase or sale of gold.

Gold futures are usually used to hedge against inflation or speculation. For example, jewelry companies can trade futures to lock in a future price for materials and inventory. Investors and traders can use futures to participate in the markets without any physical backing of gold.

Gold ETFs

A gold ETF is a fund that owns physical gold and tracks the metal’s price. It’s important to note that when you purchase shares of a gold ETF, you do not own any physical gold. You are investing in the fund’s performance, which will be invested in gold.

The most popular gold ETF is SPDR Gold Shares (GLD), which was launched in 2004. GLD holds about 1,300 tonnes of gold and is one of the largest holders of metal in the world.

Other popular gold ETFs include iShares Gold Trust (IAU) and ETFs Physical Swiss Gold Shares (SGOL).

Gold Mining Stocks

Gold mining stocks are shares of companies that operate mines and produce gold.

Investing in gold mining stocks is a way to get exposure to the price of gold without buying the metal itself.

The most popular gold mining stock is Barrick Gold Corporation (ABX), which operates mines in Australia, Africa, North America, and South America.

Other major gold mining stocks include Newmont Mining Corporation (NEM) and AngloGold Ashanti (AU).

Gold Mutual Funds

Gold mutual funds invest in various gold-related assets, including gold stocks, futures, and other precious metals.

The Fidelity Select Gold Portfolio (FSAGX) is the most popular gold mutual fund, which has been around since 1986.

Other popular gold mutual funds include the Vanguard Precious Metals and Mining Fund (VGPMX) and the Tocqueville Gold Fund (TGLDX).

Things To Keep In Mind

Make sure to do your homework before you make your first investment in gold. While similar in many ways to an investment in real estate or stocks, it has its differences. For example:

  • Gold is a long-term investment. It takes time for the price of the metal to increase, and you may not see any return on your investment for several years.
  • Gold is a volatile asset. The price can go up or down quickly, and it can be challenging to predict where it will move next.
  • Gold is a hedge against inflation. This means that when the value of the dollar is going down, the price of gold usually goes up.
  • Gold is a physical asset. Unlike an investment in a stock or bond, you can hold your gold investment in your hands. This brings peace of mind to many investors.

Secure Your Retirement With A Gold IRA

A Gold IRA is a retirement account that allows you to invest in gold and other precious metals as opposed to stocks, bonds, and other funds. Gold IRAs offer the same advantages as traditional IRAs, with the added benefit of protecting you from government tax schemes.

When investing in a Gold IRA, you only pay taxes on your contributions, not the gains. So while with a traditional IRA, you will be paying taxes on any withdrawals, with a Gold IRA, you are only taxed based on the value of the gold at the time you bought it.

With inflation on the rise and uncertainty in global markets, investing in a gold or silver IRA with Noble Gold is an excellent way to secure your future.

Open a Gold IRA with Noble Gold Investments Today!

Opening a Gold IRA with Noble Gold is fast and easy. Opening an account only takes about five minutes and won’t require any secure information. Once you’ve opened your account, someone from Noble Gold will reach out to begin the onboarding process.

We can help you fund your Gold IRA for the first time or even roll over an existing IRA or 401(k). Whichever funding method you choose, there are no complex hoops to jump through or banking forms to fill out.

To learn more about investing in gold, contact Noble Gold Investments today. A team member would be more than happy to walk you through your options.

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