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.