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No cuts to 401(k)s or IRAs

By Jennie L. Phipps ·
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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November 29, 2012 at 2:50 pm

When you retire and you no longer work, you can convert your 401K to an IRA. When you are able to take money out without any penalty, any amount taken out will be taxed.

Contributions to Roth IRAs are monies that have already been taxed. Money taken out of this type of IRA is not taxed.

How many times can you tax the same money? Seems pretty stupid to me.

Alan Rubin
November 29, 2012 at 2:38 pm

I think every perk that Congress gets at the expense of us taxpayers should be taxed at a flat rate of 50%. Their salaries, insurance, travel, dinners/drinks out, their pension. Everything they get should be taxed at a flat rate of 50%. Another option is to get rid of Congress altogether. They are so corrupt that I think we would be better off without them.

November 29, 2012 at 2:33 pm

Cut goverment pension plans. Why shound we pay for their retirement to. Can't they pay for their own retirement plan.

Larry G.
November 29, 2012 at 2:30 pm

I thought the idea of tax deferred retirement funds were incentives to save more now so you won't need gov. assistance later. Plus, taxes will probably be higher when you retire AND most people will not have as many deductions by then as most will have homes paid for & etc. Eliminating tax deductions is one thing, but how far is it until the gov. decides it will manage ALL your retirement funds for you. This will put all retirement monies in all funds (regardless of where they are and who owns them) in the hands of the gov. We've all seen just how well that works via social security.

Sara Ogle
November 29, 2012 at 1:57 pm

I think we should tax religous org., not the churches just the other business they buy. They should be tax just like corporations if they buy a burger king then they should be tax as other business. Pay Senate and Congress, for when they are actually at work. How many times have you seen the representative at a office at home. Pay them for 17 weeks at work. The only thing they agree on is a payraise for themselves. Our leaders should have the same medical plans and retirement plans that medicare has. They have sat and watched retirements plan yanked out from under employees and haven't proposed anything to help the workers. Take 50% of their pensions and see how happy they are. Are they blind congress has a rating in the 20% are they thinking we are happy with them Democrats and Republicans. Our President cannot do anything with what he is working with. Supreme Court get paid their salary for the rest of their lives put them on a monthly retirement benefit that is reasonable. Start at the top and cut. Quit taxing everthing for the regular American.

November 29, 2012 at 1:52 pm

Why don't we start taxing donations to political campaigns? We should start considering this as income to the candidate and make them pay taxes on it. With the billions that are wasted on political campaigns at all levels of government it could help narrow the gap. Plus, if they had to pay taxes on the contributions they would have less money to spend on negative advertisements which would be a great benefit to us - we'd have to watch and listen to less rhetoric.

George K.
November 29, 2012 at 1:52 pm

What about all of the deferral plans Companies put in place for their executives to get around these caps. SERPS for example.

Fred Yde
November 29, 2012 at 1:46 pm

All of us, and I mean every thinking person in the United States, needs to read "The FairTax, The Truth"...then we will collectively understand tax reform and how it is possible to have everything we have on the table (government programs), sacrifice very little of our individual savings, and get our economy moving again without government interference. BUT, and it is a BIG BUT..we have to put pressure on Congress, because they have so little courage to do the right thing without pressure from us. When you understand all the elements of The FairTax, which is on the floor of both houses, you should feel compelled to write, e-mail, call and cajole our spineless representatives into action.

D Bishop
November 29, 2012 at 1:22 pm

The solution starts with balancing the check book that congress already has. More tax revenue just means more waste if they don't change from giving away unecessary entitlements here and foreign countries. We have a goverment that never has enough.

November 29, 2012 at 1:15 pm

FLAT TAX is the right thing to do. NO DEDUCTIONS, just calculate the percentage you owe, based on the amount that you make, then pay the taxes, Have the tax amount taken out of your check whenever you get paid, be it weekly, the 1st and 15th, monthly or whatever it may be. COMPANIES are to pay just like the individual has to pay, and NO DEDUCTIONS. COMPANIES can pay at the end of every month of the year. Money is in the economy and the government has it readily at hand to run rhe country. GOVERNMENT has to CUT their spending. FLAT TAX-YOU GET MONEY-YOU PAY TAXES. SIMPLE-SIMPLE-SIMPLE. Don't let the government make it complicated, trying to confuse us all and say it can't be done. DO IT!!!