What’s the Tax Advantage of 401(k)s?

Alicia H. MunnellLaura Quinby Anthony Webb

IB#12-4

The brief’s key findings are:

  • The tax deferral for 401(k) plans costs the Treasury about $50-70 billion per year.
  • Calculating the cost requires comparing how much individuals would pay in taxes on savings within a 401(k) to how much they would pay outside a 401(k).
  • Recent deficit reduction proposals would lower 401(k) contribution caps, which would reduce the tax advantage of 401(k)s for high earners.
  • However, these proposals would also eliminate preferential tax rates for dividends and capital gains, which would increase the attractiveness of 401(k)s.