Stock Buyback Taxes Could Hurt 401(k) Value
During State of the Union, President Biden proposed a tax that could harm the retirement savings of anyone with a 401(k), IRA or pension plan. He proposed quadrupling the taxes on corporate stock buybacks. Biden and the Democrats see buybacks as an unjust windfall for executives. In reality, they are a pillar of support for the stock market. And when that pillar is gone, prices can come crashing down.
This tax comes at a terrible time. 401(k) plans and IRAs have lost roughly $1.4 trillion and $2 trillion respectively since the end of 2021. Biden tried to pass this tax before in his bloated “Build Back Better” social justice bill. The Congressional Budget Office had determined it would be a $124 billion tax hike.1
Biden justified the tax hike by claiming that stock buybacks reduced corporate investment. The Tax Foundation found the opposite to be true. “A large body of evidence supports the idea that companies generally only consider stock buybacks when they have exhausted their investment opportunities and met their other obligations.”2
Buyback Benefits
Buybacks have been a major reason behind stock market gains over the past decade. This tax threatens that growth. “Corporate buybacks – a major catalyst for the bull market since the Great Financial Crisis – will likely be dramatically reduced going forward,” warned Bensignor Investment Strategies.3
The benefits of corporate buybacks include:
Increased Stock Prices and Earnings Per Share: When a company buys back its own shares, it reduces the number of outstanding shares. This increases the demand for the remaining shares. The increase in demand drives up the stock price. The reduced number of outstanding shares also results in greater earnings per share.
Improved Financial Performance: Companies buyback their stock when they have excess cash and believe it is undervalued. This shows confidence in their financial future. The appearance of a strong financial position can increase investor demand and raise stock prices.
Increased Dividends: Companies may also increase their dividends after a buyback. Dividends can provide an additional source of income for 401k plan participants. Increased dividends can signal to investors that the company is financially stable. It also shows a commitment to returning value to its shareholders. This commitment can improve corporate governance and lead to better financial performance.
Unforeseen Consequences
This administration will rush to get these new taxes into effect. They need revenue to continue funding their agenda. But not enough research is being done to reveal the impact the taxes will have on stocks, retirement funds, or the economy.
In addition, any new taxes come with new issues of compliance. Years of legal wrangling are inevitable. As noted by global tax law firm Skadden, “Because of how the provision defines a ‘repurchase,’ the excise tax could be triggered in many mergers and acquisitions that do not appear to involve stock repurchases as that term is commonly understood.” The new law creates revenues for lawyers and costs for companies. And those costs get carried forward to the consumer.4
These new taxes target the securities found in retirement funds. To protect the value of your funds, you can move to assets that are not targeted by the new law. Precious metals in a Gold IRA can preserve your wealth from the new taxes. Contact us today to learn more.
