The Employee Benefit Research Institute’s 2013 Retirement Confidence Survey recently found that 82% of workers participate in an employer-sponsored retirement plan, and an additional 8% have money in a plan they don’t contribute to. With so many people covered by 401(k)s, it’s clear that the impact of changes to their tax treatment could be substantial.
Protecting the tax incentives built into 401(k) plans is one of the biggest goals for The American Society of Pension Professionals and Actuaries (ASPPA). Unfortunately, tax changes that affect business owners could dissuade some employers from offering plans.
Brian Graff, executive director for ASPPA, spoke with AdvisorOne at the ASPPA 401(k) Summit on March 5 about the potential impact of changing those incentives. He referred to the Brookings Institution’s proposal that capped retirement savings deductions at 28%. Because business owners who offer their employers 401(k) plans are already taxed on contributions made to the plan and would be taxed again when they take a distribution, the proposal effectively calls for a double tax on retirement savings, he said. “No one likes taxes to begin with,” he said, so why would anyone want to pay twice?
Such a move could lead to declining savings rates among workers. Graff pointed out that investors are 14 times more likely to save if they have a plan through their employers than if they have to get an IRA on their own
Even so, since they allow investors to build tax-deferred income until distribution, IRAs are still valuable tools for retirement savings. “If you’re already maxed out [in your annual 401(k) contribution], it’s a great way to do supplemental savings,” Graff said.
Graff reminded us that Roth IRAs can’t be claimed as a deduction like traditional IRAs. He added that although the Roth conversion is not a “popular item” due to the subsequent increase in tax rates, the charitable rollover was extended in the American Taxpayer Relief Act of 2012 for rollovers made before Feb. 1. “It’s a way to make a contribution and avoid limits on items that apply in 2013,” Graff added.
Annuities’ tax-deferred growth is one of the biggest draws for investors. A report released in March by the Insured Retirement Institute found almost three-quarters of boomers consider tax deferral an important factor in picking any retirement product, and about 20% said it was their primary reason for owning an annuity specifically.