Retirement Blog

Finance Blogs » Retirement Blog » No cuts to 401(k)s or IRAs

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.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
Mike Andrews
November 29, 2012 at 7:25 pm

Stop giving welfare to illegals. They never paid taxes and never will. They all live by a system, where they work and get paid under the table so to claim maximum welfare for their anchor babies; which means they don't pay taxes and steal from the tax payers. This will only get worse because more and more illegals will come to the United States to get this free ride because our government is allowing it.

Rosemarie Hoyt
November 29, 2012 at 6:58 pm

I agree totally with Vicky Harrison. Enough is enough. Cut some of the government, we have grown beyond what is acceptable.
Do you know what benefits all the congress recieves and the senate. I don't see anyone talking about reducing their benefits.
I am retired and on a fixed budget, this new tax that they are looking to charge will be
spent before they even take it.
THis entire country needs to revamped.

Linda Maloney
November 29, 2012 at 6:58 pm

I will be 60 in July, I am not working, but we have been saving to pay off our retirement home, Now we do not have enough money in our current home and will have to use our retirement. 401K and Bonds to bail us out and pay more taxes we earned. I can only hope social security will be there for us. Since that will be our only source of income. I feel very lucky, because I know others who are in worse shape than us.

Stephen Newcomb
November 29, 2012 at 6:53 pm

Seniors are targeted because we've served your usefulness to socienty. No-one's afraid of a senior grabbing a rock and hurling it through a window. No-one's worried a senior will stand in protest, or make headlines with outragous demands. There is nothing we can teach the youth of today, because they cannot sit long enough to listen. Leading by example is useful only to those who watch. No-one is watching. No-one is listening.

November 29, 2012 at 6:52 pm

How about we stop giving money to every foreign country, most of which hate us. Second, I agree we should stop giving handouts to illegals. Oh, if you collect welfare you need to take a drug test to get your check.

Vicky Garrison
November 29, 2012 at 6:51 pm

The government has run this country into the ground. I am so sick and tired of hearing about raising taxes to get the country out of debt, but will spending cuts also follow? I see Congress rubbing their hands together thinking, "Wow! Look at all the extra money I can dish out to special interests to gain votes!" I too am disgusted with all the money we give away to illegals and people on the public dole through different programs. My husband and I work too hard to have are tax money wasted on these people. Most of the people in this country are insane--they keep re-electing the same idiots who got us into this mess. For all the bleeding heart liberals who want all these programs, let THEM pay for them. So much is wrong with our government, I don't know if we'll ever get out from under! To our elected officials--"Keep your hands out of my pockets until you get your own house in order! Stop the spending!!!!"

Stephne Porterfield
November 29, 2012 at 6:21 pm

It amazes me that older people are being targeting on a daily basis. My husband and I and our employers paid over $300,000 into the social security fund which was wasted when the government put that money into the general fund. They call what we worked our tails off for, an "entitlement". Now they want to punish us for saving for our retirement. Enough is enough. Stop giving benefits to illegals and people who are just to lazy to work!

Denise Sanderson
November 29, 2012 at 6:09 pm

I agree with Thomas Nichols. Flat rate and rework the welfare programs. I am so sick of driving around to and from work and seeing all these thugs running around with their pants down and WHITE sneakers that "CAN NOT get dirty". Then you have all these young girls having litters to keep their section 8 vouchers. Go into your local clinic,(yes, clinic because I CAN"T AFFORD INSURANCE)and they are full of people from other countries, living off my tax money and I WORK!! I work 60 hrs a week!!!!! This is messed up.

connie mac
November 29, 2012 at 6:08 pm

I think they should cut back on what they spend on the illegals and stop giving our hard worked money away FREE I worked all these years for my pension and cut sesame street funding.REALLY

Thomas M. Nichols
November 29, 2012 at 5:37 pm

I believe we should have a flat tax of 10% of all income with no exemptions or deductions for anyone. No deficit spending. Phase out all social well fair programs.
Return well fair to what it was in the 30's & 40's - go to the county court house to pickup agricultural subsidy surplus food.