A Bloomberg Opinion piece on 401(k) plans by Aaron Brown that’s been making the rounds on Twitter and in financial media is filled with factual errors that undercut the arguments it tries to make.
Brown, an author and former head of risk management at AQR Capital Management, argues that 401(k) plans today don’t have the tax advantages they had when first introduced in 1980, based on comparisons of tax and interest rates.
“In 2020, there is no tax advantage remaining to the 401(k),” writes Brown, who suggests that investors would be better off with low-cost tax-efficient investments in a taxable account. 401(k) fees have fallen sharply since 1980, but now retail investors can invest in tax-efficient diversified index funds for little or no cost, explains Brown.
His argument, however, is based on erroneous data.
Brown says the marginal federal income tax rate for a median-income married couple with two children was 43% in 1980 and 12% today.
Not true. The 43% marginal tax rate applied to income of $35,200 to $45,800 in 1980 when the actual median income for a family of four was $24,410, according to the Census Bureau. After the standard deduction and exemptions for a married couple and two children, the taxable income would be subject to a 24% marginal tax rate, according to Jeff Levine, director of Advanced Planning at Buckingham Wealth Partners.
Levine discussed the column in a video posted to Twitter and in an interview with ThinkAdvisor.
That claim is wrong, and the article contains numerous substantial factual inaccuracies.
Let’s discuss… https://t.co/bcpuY7izJi
— Jeff "The Buckinghammer" Levine, CPA/PFS, CFP® (@CPAPlanner) July 22, 2020
Brown tells ThinkAdvisor that the median income figures he used are from the IRS, not the Census, and that they are more reliable since they’re based on actual tax returns, rather than what people tell the Census Bureau.
Brown also errs when comparing the capital gains tax rate of 1980 with today. He uses the 28% maximum capital gains rate in 1980 and compares it to the lowest capital gains tax rate today (0%).