Could the feds take your private retirement fund?

With the continuing growing deficit, Treasury Secretary Timothy Geithner is ringing alarm bells across Washington, D.C., warning of a disastrous outcome if an agreement to raise the debt ceiling is not made soon. And after many warnings, the United States has hit its $1.43 trillion debt ceiling hard. In response, GOP leaders have demanded cuts in federal spending equal to any increase in the limit while maintaining a strong line against tax increases.

This has caused the Treasury to scramble and find ways to make cuts, and to find cash, so one of the ways it will scare up extra money is by putting off saving for the retirements of federal workers — in effect, short-term “borrowing” from public pension funds. By suspending investments into the civil service retirement and disability fund, as well as putting off reinvestments into another big retirement bucket known as the G-Fund, Treasury could “claw back” up to $202 billion.

That though, is only 10% of the 2 trillion the agency says it needs to stay afloat until after Election Day 2012, and it will have to be put back. Halting public pension payments would only be a short term fix to a never ending problem. And another way, such moves could instead be seen as the first step toward an eventual tax or outright seizure of private savings in tax-favored retirement plans.

You might scoff at the idea and laugh, but it has already happened in Argentina and Hungary, and it just happened last week in Ireland. Hungary seized $14 billion from private pensions, while Bulgaria and Poland demanded partial government control of private savings.

Even though Americans are unprepared for retirement, many do have 401Ks, which holds about $3.1 trillion in plans, as of December 31.

Fidelity Investments, which manages 11 million participants in 16,500 employer-sponsored plans, says savings are at the highest level in years. The average account balance is at $74,900, up 12 percent from the previous year and at an all-time high, Fidelity told Bloomberg News. Vanguard Investments said of its 3.5 million participants’ average account balances hit $79,077 recently. For long-term savers, the average was higher, Fidelity noted, at $191,000 for those who had saved for 10 continuous years and $233,800 for those over the age of 55 who had saved for 10 years consecutively. Newsmax

Now these are technically taxfree, until the holder takes out of the distribution. But the government could order earlierdistributions and then simply tax them more heavily. . As it is now by law, you have until age 70 1/2 before you must take from the fund. That affects all IRA-type funds except tax-free Roth IRAs, including SEP and Simple IRAs commonly used by small business owners.

And it doesn’t stop with the 401Ks, as Roth IRAs could be undone, too. Megan McArdle at The Atlantic believes both traditional IRAs are in danger due to normal tax increases and that tax-free Roth accounts eventually will be tapped, too. Now the government raised the income limits for conversions of Roth IRAs and fearful Americans responded. Conversions subsequently spiked fourfold in 2010, Fidelity Investments said in February.

“I think that Congress is going to go after all of it,” McArdle writes. “But Congress doesn’t have to do anything special to get money out of traditional IRAs; it just has to raise income taxes. (401ks and traditional IRAs are taxed at ordinary income tax rates). Roth IRAs, on the other hand, represent a sizable pool of tax-free assets.”

Newsmax

Oh and we can’t forget municipal bonds. Congress could remove the tax breaks, as Obamanut’s recent debt commission recommended that. The CBO figures that eliminating the tax exemption would save $143 billion from 2012 to 2021. Angel Gurria, Secretary General of the Paris-based Organization for Economic Co-operation and Development (OECD), recently warned that the developed countries face a “Mount Everest” of debt that will take a generation to unload.