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No cuts to 401(k)s or IRAs

By Jennie L. Phipps · Bankrate.com
Wednesday, November 28, 2012
Posted: 2 pm ET

Are 401(k) and IRA plans likely to fall or be pushed off the 'fiscal cliff'? The American Society of Pension Professionals & Actuaries, or ASPPA, thinks that's a risk we ought to be worrying about.

As Congress looks for ways to manage the out-of-control budget, one of the most talked-about tools is tax reform -- lowering the rate and broadening the base, so more people pay taxes but at lower rates. To achieve that, something has to go. ASPPA is spreading the alarm that one of the biggest targets -- and maybe the easiest -- is tax-advantaged retirement savings plans, which cost the government as much as $100 billion a year in tax breaks.

"If you talk to individuals on the Hill about the likeliest targets -- retirement savings, mortgage interest and charitable contributions -- it is hard to find somebody who will say 'Yes, let's get rid of them.' But anybody who is talking about lowering rates and broadening the base, is going to have to go after all those things," says Judy Miller, director of retirement policy for ASPPA.

In the case of retirement savings plans, Congress could go in various directions -- none of them good for your retirement planning. It could:

  • Do away with the deduction for retirement savings.
  • Eliminate the deduction for high earners.
  • Further cap the deductible amount (currently $17,500, or $23,000 for those 50 and older).
  • Tax future retirement savings earnings.
  • Levy taxes on past tax-free and tax-deferred retirement savings income.

Though some argue that most of the tax benefits of retirement plans flow to the wealthy, Miller says this will hurt people who earn less than $100,000 the most. "The tax deduction is very important to people with more modest incomes. For someone in the 10 percent bracket, that 10 cents on the dollar is very important to their cash flow."

One of the arguments for choosing this route to raising taxes stems from a recent study of the retirement system in Denmark, which is similar to ours. That study indicated that eliminating tax incentives wouldn't make much difference to most savers. But Miller says that's beside the point. The eliminations of deductions would hit small business hard. "To think that businesses are going to be able to set up a retirement savings system without a tax incentive is just plain wrong.

"Most of the money to pay for these plans comes from the tax savings that the business owner is going to get. When people talk about eliminating tax incentives, they don't consider this. We see these theoretical proposals and we look at them and say, 'You're kidding. This plan clearly comes from someone who has never set foot on the pavement, who has never worked with employers on these plans,'" Miller says.

If you want Uncle Sam to keep his mitts off your 401(k), IRA or other tax-advantaged retirement plan, tell your congressmen. "We need members of Congress to hear from their constituents that they care about these plans," Miller says.

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59 Comments
Victor Gelsi
December 04, 2012 at 11:32 pm

victor
All these talk of cuts, but not one person mentions getting rid of aid to other Country's. We are worse than broke yet we give away billions. Also do we need to have 135 military bases in other Country's ?

GUY GRAZIOSO
December 04, 2012 at 1:58 pm

WILL SOMEONE PLEASE EXPLAIN TO ME WHAT "FAIR SHARE) IS? I KEEP HEARING PEOPLE SAYING THAT THE SO CALLED, "RICH" ARE NOT PAYING THEIR FAIR SHARE, WELL, LET'S TAKE CARE OF THAT; ELIMINATE ALL DEDUCTIONS FOR FOR EVERYBODY AND TAX EVERYBODY WITH THE SAME TAX RATE ON ALL INCOME THEY MAKE. HOW CAN YOU ARGUE WITH THAT? THEN NO ONE COULD COMPLAIN THAT SOMEONE ELSE WAS NOT PAYING THEIR FAIR SHARE. EVERYBODY NEEDS TO PAY THE SAME RATE FOR FAIR SHARE TO WORK. I ALSO AGREE THAT PEOPLE SHOULD PAY F.I.C.A. AND MEDICARE TAX ON ALL WAGES EARNED FOR SOCIAL SECURITY AND MEDICARE, BUT IF THAT IS DONE THEY SHOULD ALSO RECEIVE A HIGHER PROPORTIONAL BENEFIT RETURN FOR DOING SO.

BigBlue Crew
November 30, 2012 at 1:51 pm

Why is it that in all these comments it seems implied that the low wage earners in our country were somehow forced into their condition...like the Chinese?? Every single American makes choices every day, and the people who continue to make bad ones are less valuable to society, and hence, compensated less. It is brutal, but that is the result of capitalism and democracy. If they don't have enough money to provide for their kids then they should get a 2nd or 3rd job like my Dad did when he lifted our family out of the tenements of Hells'Kitchen. Tell the sob story to somebody else - stop looking into my wallet to cover your irresponsible shortfalls.

Matt Brandt
November 30, 2012 at 5:49 am

Don't you dare touch our 401k savings plans. We have worked hard for our money, it is not fair to attack the people who are responsible. If you want some series problems go ahead and try. DO NOT! Touch our savings. Here 's a novel idea...STOP SPENDING

George Rick
November 30, 2012 at 12:25 am

WrkrB must be Romney: those 48% pay a lot of taxes (ever bought anything and paid sales tax, WrkerB, or had social security or payroll taxes deducted from your paycheck?) And lets not forget the large # of soldiers and retirees in that 48%, who have clearly done a lot more for the country many (WrkrB?) ever did.

Its clear math (maybe beyond WrkrB) that we need both spending cuts and increased revenues to keep America going. But if taxes have to be increased, why wouldn't it START with those who can afford it most but pay the least % (per billionaire Warren Buffet et al) before it gets to anyone else? The largest part of America's economy is consumer purchasing, & its a fact that we (the average consumer) drive the economy MUCH more than fictional "job creaters". So encourage the middle class -- Ford & Chevy are more important to us (U.S.) than Mercedes and Rolls Royce. Then we can talk about the tax deduction cuts that people won't say out loud -- no more tax-free 401(k) or pensions, no more deductions for your home mortgage or kids education (Catholic or college), lower Medicare benefits for our parents (and us, in the end), etc. Something's gotta go, & we need open communication on what we will and won't do to reach some consensus on what's best for all Americans. As a 60+ person, I've seen good people (Kennedy, Reagan, et al) lead us, and bad people snipe. Stop saying what you WON'T do and say what you WILL do -- then people will know what kind of person you really are, and whether your ideas are worth the powder to blow it to ...

David Allen
November 30, 2012 at 12:22 am

Just who IS this 48 per cent of the population that doesn't pay taxes? I assume we are talking of Federal Income Tax.

The uber rich one per cent pay little or no income tax. Willard Romney hasn't paid a red cent in over ten years. That being said, there are a large numver of people in the lower income status that pay no taxes, because they earn too little. Consider a married couple, no kids. Before there is a cent of income tax levied, they have a standard deduction of $11,000, plus two exemptions totaling another $7,600. Thus, the first $18,700 in income is tax free. There are some people who get an earned income tax credit. The person who works part time at a fast food joing probably doesn't even make enough to cover one exemption plus his standard deduction. Somebody on this page better get real.

"Paying no taxes" covers a pretty broad base. What about gasoline tax, local sales tax, fees, and a myriad other "local" taxes? Renters pay the owners' real estate taxes--not the owner. Think about it before you make a SWAG, WRKR B. (SWAG--SCIENTIFIC WILD ASS GUESS.

Doyle Bird
November 30, 2012 at 12:17 am

Why doesn't goverment employees pay in to social security, Medicare & the same pension plans the rest of Americans do? Maybe then Congress would legislate in the real interest of all Americans.

Buddy Caudill
November 29, 2012 at 11:54 pm

I have a suggestion!
Let the congressmen/ women cut out their own "Government Retirement", that is guaranteed to them , for life!
Would this not save the government a bunch of money???

I agree with those who commented that the people in this country that are expecting something from the government, while not contributing anything is wrong! Totally unfair to those of us that have worked all our adult lives to attain what little retirement we have!

WrkrB
November 29, 2012 at 11:42 pm

I think before we start down the 'Let's soak the Rich' warpath, it would be a good to investigate why 48% of American households pay no income tax. That means nearly half of Americans are coasting, while the rest of us are footing the bills. It doesn't appear to me that 48% of the population is starving, shivering in the dark,or selling their daughters into prostitution to cover basic necessities. That would be the typical 3rd-world country. We're not that -- yet. I think paying 'fair share' should extend to nearly all Americans. And by the way,those with very modest incomes in the U.S. are 'Rich' compared to most of the rest of the globe.