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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 5:09 pm

Just leave social Security alone!! use some of that stimulis $$ to pay it back If anything nbeeds a Bailkout it is social Security and then a Flat Tax finally would solve a lot of $$ problems. Like sais here too simply . Government has to play games to hide how much they waste!! I am so tired of all this we need to ZClean House send them all packing democrats are and always will be TAX & SPENDERS I am 74 and all I remember is mostly a democratic big spending Party in charge . They used to start wars to build the eeconomy now they can't because we are weaker and most countries have Nukes now.

sally j
November 29, 2012 at 5:03 pm

I agree that a flat tax is a great idea. However, I don't think it will ever happen. Think about how many people would lose their jobs if country went to flat tax - CPAs, accountants, tax preparers, software companies that develop software that supposedly make it easier for you and me to do our taxes and many IRS employees. These are all very powerful and probably have strong lobbies in D.C.
From my view, I think it would be great to not have to keep track of all possible deductions and to fill out complicated forms.

W. F. Johnson
November 29, 2012 at 4:28 pm

All American citizens should be registered and pay a flat tax. Those not identified as a citizen of the U.S.A. should be evaluated and identified. They too should pay their fair share. No loopholes. A flat tax on all income.
Discontinue giving money to countries not friendly to America.
Stop feeding pork to lobbyists. Stop spending money we do not have. Build empires when we have a surplus not off the peoples backs when times are difficult.

Audrey Miller
November 29, 2012 at 3:58 pm

Congress's retirement entitlements needs to be addressed. ie: vested only after 7years of serving and to begin receiving benefits with same retirement age that the gov't uses for the general public.As in Social Security the GOP wants to WACK......

Sharon J
November 29, 2012 at 3:55 pm

Why don't we have pension reform for all elected officals.

November 29, 2012 at 3:32 pm

Get rid of all the deductions - especially those for 2nd homes. Only allow deductions for the main residence. And absolutely no
deductions for churches, synagouges, temples, mosques etc. We have allowed ministers, rabis, and other clerics to abuse their congregations through demands for cobtributions. So, no deductions for giving to any religious bodies. People of faith do not need to be compensated for giving. That's their faith. Additionally, if you have saved for retirement, no taxes on those funds up to $500,000.

November 29, 2012 at 3:31 pm

Whatever Congress comes up with Congress will be exempt. Bet me!

Duane Weaver
November 29, 2012 at 3:12 pm

401k accounts are not tax free. They are tax deferred. They were set up to encourage people to save for their own retirement. The whole amount of the 401k is taxed when you start making withdrawals, not just the capital gains. Additionally, you can't declare / deduct the losses The tax rate paid will be based upon the rates in effect at the time of withdrawal, which will likely be higher for most people given this government. The government gets more money in tax revenue by keeping the system as it is with the added benefit of people having security in retirement and money to spend in the economy, which stimulates jobs. It is a win for both Republicans and Democrats.

November 29, 2012 at 3:05 pm

Flat Tax verses the Fair Tax. The Fair Tax is probably to complicated for our government to administer. The Flat Tax is quite simple and the IRS could be greatly reduced. This would save our government an overly large expense.

S Glick
November 29, 2012 at 2:54 pm

Agree with "jaybo33j" above: The "Flat Tax" is the simple and equitable way to go: All pay a fair share, individuals and business alike.
Then there is the question of how much courage members of Congress have to move forward with a real solution to the over-spending by making logical cuts in the overall "budget."
Were we to pull out of the absurd war situation, currently wasting BILLIONS with no end in sight, we might find some relief.
Then, to cut off any and all foreign aid to countries not on the same page with us politically, and to those not practicing fair and reasonable human rights, we might be on our way to a balanced spending concept.