Retirement planning officials are worried that the elimination of certain tax incentives for retirement savings plans included in President Barack Obama’s budget for 2013, which he released to Congress on Monday, will hinder retirement savings.
Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries, says that Obama’s proposal to limit the tax benefit for retirement savings for families earning more than $250,000 is “a bad proposal based on bad math.”
Unlike other targeted tax incentives, Graff (left) said in a statement, “the tax break for retirement savings is a deferral, not a permanent write off. Under the President’s budget, these taxpayers wouldn’t just lose a current tax break, they would actually be penalized for saving–paying taxes now and taxes later.” This, Graff continues, “will discourage small business owners from setting up or maintaining retirement savings plans for their employees. Workers that lose workplace retirement savings plans will be the ones that really pay for this misguided proposal.”
Under current law, Graff explains, there is already a $250,000 cap on compensation that can be used to calculate contributions to 401(k) plans. “The President’s proposal effectively doubles down on this limit for 401(k) plans, and takes an axe to the tax incentives that encourage small business owners to offer these types of plans at work,” he said.
The Insured Retirement Institute notes that while the president’s proposed budget “does not explicitly call for changes in the tax status of annuities for all,” IRI is concerned about several proposed changes, “including the elimination of certain tax incentives for retirement savings and new limitations on deductions for retirement contributions.” IRI says that policymakers need “to protect incentives in place for Americans to attain financial security in retirement, particularly by maintaining the tax-deferred status of annuities for everyone.”
IRI’s “research has shown that the tax-deferred status of annuities has been pivotal in helping middle-income Americans utilize lifetime income strategies as part of their retirement savings plan,” said Cathy Weatherford (left), IRI’s president and CEO, in a statement. “Removing this incentive would not necessarily increase tax revenue, but certainly would add a new barrier that would prevent Americans from attaining lifetime income coverage. With today’s unprecedented retirement challenges, now more than ever, we need to protect the incentives available to help Americans attain a financially secure retirement.”
Obama’s budget does, however, provide for automatic enrollment in individual retirement accounts. Obama’s plans say that it will improve retirement security for millions of workers by requiring employers with more than 10 employees, who do not offer a retirement plans, to offer an automatic IRA.
As the proposal explains, with an automatic IRA, retirement savings are deducted from each paycheck and deposited in the worker’s own account. Employers do not make contributions, and employees can opt out of the program at any time. The proposal also includes a credit to help small employers set up auto-IRA arrangements, and it doubles the existing start-up credit for small employers who offer a retirement plan, such as a traditional pension or 401(k). The administration says this proposal would provide $15 billion in benefits over the next 10 years.