This article came from a comment by Jack Towarnicky
It comes as we consider the question raised by timothy Lancaster;- “should we help employees in debt before encouraging saving.”
I don’t know what the rules are in the UK, but in the states, 80+% of 401k plans in the states have a ready made solution – 401k plan loans. All qualified plans, including pension plans, could permit plan loans.
Plan loans are tax-free liquidity.
“Done right”, plan loans improve both household wealth AND retirement preparation.
The process is:
Save
Get employer match
Invest
Accumulate earnings
Borrow to meet a short term need
Adjust your asset allocation because the plan loan principal never leaves the plan but becomes a different kind of fixed income investment
Repay the loan which continuing to make regular contributions
Rebuild the account for a future, larger need
Repeat as necessary up to and throughout retirement
What is “done right?”
Done right includes three features:
First, electronic banking. Essential because, at least in the states, people frequently change employers, median tenure of American workers has been less than 5 years for the past 7 decades.
Second, a line of credit structure. Essential so that people know what liquidity they have access to on any given day, that there are minimal limits on the number of times individuals can access liquidity, so hat they do not borrow more than they need to meet a specific need.
Third, behavioral economics tools, processes and concepts designed to maximize the likelihood of repayment. Essential options include authorizing repayment from the individual’s bank account (so that an interruption in employment isn’t an interruption in repayment), reporting the loan to the credit bureaus, having the participant effect a “commitment bond” – a promise to repay, having the participant sign off on the loan application as both the borrower (current self) and lender (future self), having the participant confirm that they have access to liquidity from another source should employment end.
Why will this improve both household wealth and retirement preparation?
First, the individual won’t take the plan loan unless it is superior to other liquidity sources – meaning that it will have a favorable impact on household wealth compared to say a cash advance on a credit card or a personal loan.
And, for the past 18 years, the plan loan interest rate is typically less than the rate on debt from a commercial source, and greater than the rate on fixed income investments offered within 401k plans.
More reading
See: https://www.federalreserve.gov/pubs/feds/2008/200842/200842pap.pdf
See: https://401kspecialistmag.com/top-10-401k-plan-loan-myths-misdirections-and-misrepresentations/
See: https://401kspecialistmag.com/more-leakage-deeper-in-debt/
Hello Henry,
Plan loans are tax-free liquidity
I am not knowledgeable to assess the benefits of the above. However in today’s New York Times is an article by Katrin Bennhold (believed to reside in UK) entitled Taxing billionaires: California’s billionaires are in revolt. This subject is currently under consideration in UK. I have copied the complete article since it is behind a subscriber wall:
Taxing billionaires: California’s billionaires are in revolt.
In response to a proposed one-time 5 percent tax on California’s wealthiest residents, Google’s founders, Sergey Brin and Larry Page, moved assets out of the state. The venture capitalist David Sacks opened an office in Texas. Peter Thiel, who founded PayPal with Elon Musk, donated $3 million to a campaign against the proposal, which supporters are trying to put on the ballot in November.
California’s governor, Gavin Newsom, a Democrat, has vowed to fight the wealth tax, warning that it would stifle innovation. But Californians aren’t the only ones arguing about whether the ultrarich need to pay more.
The number of billionaires has exploded, and so has their wealth: In 1987, Forbes magazine counted just 140 billionaires around the world. Last year, over 3,000 people made the list. Elon Musk alone is worth some $700 billion — not far off the collective fortune of the entire class of 1987, after adjusting for inflation.
Yet they pay taxes at rates well below those of typical taxpayers, for reasons I’ll explain below.
There is broad public support for taxing wealth. Governments need money, the rich are richer than ever and, at a time of stark inequality, the idea of raising more revenue from the ultrawealthy is morally and politically appealing to many.
But is it effective?
A bad track record
A wealth tax targets assets rather than income.
Income taxes don’t work well for the very rich. Most of their wealth is in stock and other assets, which they can structure in ways that generate very little taxable income.
The effective tax rate on the 400 wealthiest Americans, for example, stood at 23.8 percent in the years from 2018 to 2020, compared with 30 percent for the average taxpayer. That’s why some governments have tried to tax wealth more directly.
In the decades after World War II, many Western European countries taxed households’ net wealth. But most wealth taxes have since been scrapped. They are costly to administer: Unlike income, wealth can be hard to measure. How do you value a Picasso or a stake in a family-owned business? And they raise comparatively little revenue. Not so much because a lot of rich people have fled — capital flight is a relatively muted phenomenon, studies show — but because they’ve mostly managed to avoid paying the tax, thanks to a series of exemptions.
Critics of recent wealth tax proposals point to this history as a reason to avoid going down that path again. But advocates say the design flaws of the past can be addressed. And they point out that today’s extreme concentration of wealth has its own economic and political costs.
Simple taxes for the superrich
I spoke to Gabriel Zucman, the economist behind a hotly debated French wealth tax proposal.
He told me that the way to address the failings of past wealth taxes is to keep it simple — a flat-rate tax focused narrowly on the superrich. California is targeting only billionaires, of whom there are about 200 in the state. That lowers the administrative lift. It also largely solves the valuation problem: Most of their wealth is in shares of publicly traded companies, not yachts or artwork.
The biggest challenge is avoiding capital flight. The ultrarich are also ultramobile. That problem was historically overstated, but a system without exemptions would increase the incentive for the wealthy to flee in the face of new wealth taxes. One way to address that is an exit tax, which collects money from those who leave.
America already has an exit tax: U.S. citizens pay taxes wherever they are, and if they renounce their citizenship, they have to pay tax on all unrealized capital gains. Even Gavin Newsom says he might feel differently about a federal wealth tax that removes the incentive to leave California.
Those who remain skeptical argue that there are other ways to achieve similar goals. Raising the inheritance tax for the ultrawealthy and making capital gains subject to regular income tax could raise revenue and address inequality.
Where there has been some convergence recently is around the idea that inequality does need addressing.
“Extreme wealth compromises democracy,” said Kenneth Rogoff, former chief economist of the International Monetary Fund. “The rich pay very little tax. And they have incredible influence over the political system, and that’s why it’s hard to fix.”
The World Economic Forum just released a survey of its participants, who deemed inequality a major risk. It fuels “other global risks as the social contract between citizens and government falters,” the report says.
There is at least one billionaire who is attending Davos who has said he’s happy to pay the California wealth tax: Jensen Huang, the chief executive of Nvidia, the world’s most valuable company. “We chose to live in Silicon Valley,” he said recently. “Whatever taxes they would like to apply, so be it.”
END
You may wish to compare Mr Huang’s view with Mr Thiel’s donation of $3m to the campaign agaiinst the proposal (very philanthropic).
Kind regards,
Tim Simpson
In the states, 401k plan loans are currently capped at $50,000, unchanged for over 50 years.
The above response states, in part: “… The effective tax rate on the 400 wealthiest Americans, for example, stood at 23.8 percent in the years from 2018 to 2020, compared with 30 percent for the average taxpayer. …”
Just isn’t so. 40% of the 153+ million American households who filed an income tax return paid no income taxes. The taxpayer at the median, is likely paying 12% on his/her last dollar of taxable income (lowest marginal rate).
Last detailed IRS data is from 2022:
There were 153.8MM tax returns. The individual at the median had an income of $50,339. The 76.9MM in the lower half had 11.5% of all Adjusted Gross Income reported, and paid an average of $822 in federal income taxes – an average tax rate of 3.7%.
Keep in mind that these data exclude entitlements – a significant portion of the 40% who paid no federal income taxes actually receive money from the Internal Revenue Service.
See:
The NYT article data, BJ, seems to be based on August 2025 research, How Much Tax Do US Billionaires Pay? Evidence from Administrative Data by UCB’s Akcan S. Balkir, Emmanuel Saez, Danny Yagan and Gabriel Zucman.
Working Paper 34170
http://www.nber.org/papers/w34170
As for 401(k) loan limits, I think it’s the lesser of $50,000 or 50% of the vested 401(k) balance. But if 50% of the vested balance is less than $10,000, you can borrow up to $10,000 instead?
Other loan schemes will doubtless be available, including trust loans.
You also have something called GRATs, BJ?
In The Canterville Ghost (1887), Oscar Wilde wrote: ‘We have really everything in common with America nowadays except, of course, language’.
George Bernard Shaw’s equivalent quip was: ‘England and America are two countries separated by the same language’, attributed to Shaw by Reader’s Digest (November 1942).
In the light of recent developments someone may like to update such words about what divides us?
“As for 401(k) loan limits, I think it’s the lesser of $50,000 or 50% of the vested 401(k) balance. But if 50% of the vested balance is less than $10,000, you can borrow up to $10,000 instead?”
I was simply identifying the maximum nominal dollar amount of plan loans, and the fact that it hasn’t changed in over 50 years. My point was that due to the nominal dollar limit, plan loans become a valid/favored source of tax favored liquidity for all participants, without any substantial advantage to the wealthy or mass affluent.
Some background:
In DC plans, in 1975, the average account balance was ~$6,432. 401k plans did not show up in official federal statistics until 1984.
The actual code provisions limit loans only to the vested portion of the account, and the limits is $1 for $1 up to the first $10,000 of vested benefits or 50% of the vested benefit, whichever is greater, but not more than $50,000. I would note that the tax code limit is an employer limit, aggregating all plans offered by the employer.
For comparison, the average account balance in 2023 was $97,000 – today, it is likely in excess of $125,000. For example, Fidelity reports an average 401k balance of $144,400, and an average Individual Retirement Account (IRA) balance of $137,900.
The average is significantly depressed for two reasons:
– The widespread use of auto enrollment, now applied in 60+% of surveyed plans (mostly larger plans), and
– Turnover, where the median tenure of American workers has been less than 5 years for the past 7 decades, and American workers have an “average” of 12+ different employers.
Back in 1975, most workers cashed out at/after separation because the tax rules included a favorable provision. So, only a handful of workers were term vested – and most did not have multiple accounts.
Today, those tax rules are gone. So, today, one of every four accounts is that of a term vested individual. In other words, the actual average assets per participant is certain to be noticeably higher once you adjust for those of us, including myself, who have more than one 401k account.
Note also that the loan rules do not apply to IRAs. So, an individual who wants to use those IRA assert in plan loans can typically roll over assets from a Traditional IRA (excluding Roth IRAs) to their employer-sponsored 401k plan.
In nominal dollars, today’s 401k plans have significantly less assets when compared to monies rolled over to IRAs and monies that have already been spent.
So, even if we use the 2023 average account balance of $97,000 as an index, today’s loan maximum of $50,000 should be $750,000+! And, if we used the 2026 average account balance (which probably exceeds $125,000), it would be ~$1,000,000!
Clearly, the plan loan limits are not skewed in favor of Americans with the largest retirement savings.
Jack