Pension professionals are up in arms over the Federal Tax Reform Panel's retirement savings proposals, which were included in the recommendations the panel put forth November 1 on ways to overhaul the tax code, saying they would be "devastating" to Americans' retirement security.
The panel's proposed Save at Work Account is troubling because it would eliminate all employer-sponsored defined contribution plans like 401(k)s, 403(b)s, 457 plans, and SIMPLE plans, and replace them with one account. The proposal would also eliminate the tax deductions for contributions; instead contributions to the account would be made on an after-tax basis, but distributions would be tax-free. "Without the upfront tax deduction, we believe many workers currently saving in their 401(k) will choose not to save," says Brian Graff, executive director of the American Society of Pension Professionals & Actuaries (ASPPA), in a prepared statement. The panel was able to finance lower tax rates on higher income taxpayers by doing away with the pre-tax deduction for retirement plan contributions, Graff says. "It is totally unacceptable to lower tax rates for higher income individuals by sacrificing the savings tax incentives for American workers," he says.
Further, the panel will also abolish IRAs and Section 529 plans and replace them with Save for Retirement and Save for Family accounts, which would allow taxpayers to put $10,000 per year in each. Combined, the accounts would allow a couple owning a small business to sock away $40,000 for retirement on a tax-preferred basis, Graff says, compared to the current $10,000 limit. "Many small business owners will forego adopting a workplace retirement plan if they can save that much of their own on a tax preferred basis," he says. ASPPA also opposed the panel's proposal to eliminate tax incentives for annuities.
ASPPA also says that the panel's recommendation that 100% of the dividends paid by U.S. corporations and 75% of investments, including mutual funds in U.S. corporations, be exempt from tax, would mean that investments made outside of a qualified plan could have an effective tax rate of less than 4%. "If investments outside of a qualified plan are taxed at an effective rate of less than 4%, for many small business owners it will no longer make financial sense to adopt a retirement plan for themselves and their workers," Graff says.--Melanie Waddell