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401(k) Plans and Lifetime Taxes

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Slightly less than half of all workers are covered under some type of employer-sponsored defined-contribution pension plan; over one-fifth contribute more than 11% of their salary to such plans. Although 401(k) and similar plans lower one’s current taxes, they may not have the same effect on lifetime taxes. The lifetime result depends partly on future changes in tax rates. Even if taxes do not increase, taxable withdrawals from qualified plans upon retirement may place some individuals in higher marginal tax brackets. Similarly, tax-favored saving plans may reduce a younger person’s current marginal tax bracket and lower the value of current mortgage-interest deductions. Most important, large plan withdrawals in the future may subject a greater fraction of one’s Social Security benefits to income taxation.

Suggested citation: "401(k) Plans and Lifetime Taxes," Federal Reserve Bank of Cleveland, Economic Trends, no. 01-08, pp. 13, 08.01.2001.

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