President Barack Obama plans to ask Congress in early March, as part of his fiscal 2015 budget, to reduce some of the tax advantages for employer-sponsored retirement plans for higher-income earners, according to published reports.
Plus, the president wants to limit the value of all tax deductions, defined contribution exclusions and IRA deductions to 28% of income — and include an overall cap on all retirement accounts, including pensions, that could bring in $1 billion a year in new tax revenue, according to a Pensions & Investments report. Read Companies bracing for 1-2 retirement punch.
According to the report, the proposals are designed to direct more of the tax preference for retirement savings toward getting more low- and middle-income people into the habit of saving.
Based on current tax brackets, Pensions & Investments reported that the 28% limit would reduce the tax advantages of retirement savings for people earning more than $183,000 or couples earning more than $225,000. And the overall cap for all tax-preferred retirement accounts would limit them to providing an annual retirement income of $205,000, which would currently cap tax-preferred accounts at $3.4 million, but could go lower as interest rates rise.
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So, who might feel the effects of this proposal? Largely, the top 5% of tax payers. According to the Tax Policy Center, a partnership between the Urban Institute and Brookings Institution, there are about 6.07 million Americans who earned above $200,000 in 2011 and they make up the top 4.2% of taxpayers, according to published reports. Read more about the president’s tax proposal here: Who makes more than $250k, and are they rich?
And what do experts have to say about what the president might propose? In the main, they say the rich need not worry that their tax breaks for saving for retirement will be cut.
“We’ve heard these kinds of proposals being discussed in policy circles for a couple of years now,” said Skip Schweiss, president of TD Ameritrade Trust Co. and managing director of TD Ameritrade Institutional. “It would not surprise me to see these ideas become more formalized through President Obama’s 2015 budget proposal.”
But even though experts expect the president to propose reductions to some of the tax advantages for employer-sponsored retirement plans for higher-income earners, few expect any congressional action. “Given the congressional divide, it’s hard to see something like this becoming law, but of course one never knows,” said Schweiss.
From his perspective, Schweiss said there are at least three problems with the proposal that should be considered carefully.
The first, said Schweiss, is that contributions to retirement plans are made on a tax-deferred basis, not a tax-deductible basis. “That is, while I may receive a tax deduction this year for making my contribution, the government will get its money down the road when I withdraw the funds in my retirement years,” he said. “And it will get more, as it will tax the earnings as well as the contributions.”
This stands, Schweiss said, in contrast to deductions like home mortgage interest and employer-sponsored health insurance premium deductions: once those deductions are received by the taxpayer, the government will not realize the tax revenues from those items, ever.
The second consideration, said Schweiss, is that if someone is in an upper-income bracket, say 35%, and only gets a 28% deduction on her retirement plan contributions, she will pay taxes on the other 7% this year, and pay taxes on those funds later when withdrawn in retirement. “So those income dollars would be taxed twice under this type of proposal,” he said.