Reducing contribution limits or replacing tax deferrals with a tax credit "could dissuade small employers from sponsoring plans," Falcon says. "If the tax benefit to small-business owners is limited, they could choose to avoid the costs of setting up a retirement plan."
White, of David B. White Financial, agrees. "Employers are going to drop plans. A big factor in small businesses is that if it doesn't benefit the top people, they are going to cancel it, and that is going to hurt the small people too."
He sees the changes as "just another diabolical redistribution-of-wealth scheme. It is another way of hiding a tax hike. All you are doing is robbing Peter to pay Paul and moving money from one pocket to another. The biggest thing is that you are going to hurt the economy, and you are going to hurt savings."
White sees the current system of pretax contributions as an important savings tool.
"The reason 401k's are more successful that IRAs is because of the automatic withholding that is done for them, because it comes out first instead of last," he says.
In December, the National Commission on Fiscal Responsibility and Reform released its document on federal debt reduction, titled "The Moment of Truth."
"Although their guiding principles and values specifically mention the need to keep America sound over the long run by implementing 'policies today to ensure that future generations have retirement security, affordable health care and financial freedom,' the document puts forth a tax reform plan that would modify retirement plans by capping annual tax-preferred contributions to (the) lower of $20,000 or 20% of income," says Jack VanDerhei, research director for the Employee Benefit Research Institute.
"This is often referred to as the 20/20 cap. This alternative formulation of capping tax-preferred contributions would substantially reduce the current limits available under qualified defined-contribution plans," such as 401ks, VanDerhei says.
The current combination of employee and employer contributions is the lesser of a dollar limit of at least $49,000 per year and a percentage limit of 100% of an employee's compensation.
"The 20/20 cap would, as expected, most affect the highest-income workers, but it also would cause a significant reduction in retirement accumulations for the lowest-income workers," VanDerhei says.
A similar take on the matter is expressed by the Pension Rights Center.
"The reason Congress conferred preferential tax treatment is because policymakers recognize how hard it is for people to save for retirement -- particularly low- and moderate-income workers," said Karen Friedman, the executive vice president and policy director of the center, in her Senate testimony.
"These incentives are meant to encourage employers to set up plans and to encourage employees to save," she continued. "However, the incentives end up disproportionately benefiting the nation's most affluent employees, who would almost certainly save for retirement even without tax incentives. Two-thirds of the value of tax expenditures for retirement savings plans goes to households in the top-income quintile."
Friedman's organization would support tax reform to "limit leakage," meaning withdrawing money from plans before retirement.
"The main tax provision to control leakage is a 10% excise tax on certain pre-retirement use of retirement savings, which has served primarily as a steep and unfair additional tax on the poor and the middle class, while doing little to actually control the problem," Friedman said. "Congress could create voluntarily designated 401k's and IRAs that once designated could not be accessed prior to retirement -- and use carefully targeted tax incentives directed at both employees and employers to encourage the use of such lock-down accounts. Moreover, the Saver's Credit itself might be locked down so that the credit amount is not available until retirement."
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They want to take away every break from the middle class. What about the rich tax breaks end them too.
Congress give up your pension and health plans set an example. Look at all the money we would save.
Incredible! A program enacted with the support of both parties and business, to allow middle income americans to benefit from their labors, prepare for retirement, and provide capital for economic expansion and congress wants to reduce or eliminate the incentives to participate. Given the desire of congress to reduce the dependence on social security and have the individual take responsibility for their own retirement how can they even be considering this. How can we even think about doing this until every cent earned (and I use that term loosely) by a hedge fund manager and investment banker is taxed as personal income vice capital gains.
You get the behavior you reward. We used to reward home ownership, education, and saving for retirement. All seem pretty good ideas to form a solid society. What is it we want to form by eliminating the incentives in these areas? Eliminate the middle class?
would look good to cut something that doesn't effect them ! lets cut the senate or congress pay or benefits and see them yell! JTP
We are being enslaved. The average company saved 42% off of traditional retirement funds when switching employees to 401K systems. Now they are moving to save 100% (as some already do) by doing no savings match.
Question: How do you get a bunch of generic money from non-informed people into the stock market in order to inflate the value of a sagging economy?
Answer: Force them into 401K plans with minimal investment control and then down the road start to remove the other original benefits. I for one am sick of using the 401K calculator that tells me when I hit 65, if this and that happens It will be worth $900,000. Yet for the past 20 years the account has been dismal. CAN YOU SAY SCAM?
They want us too tired and too poor to fight back and I'm afraid they are winning.
To put a lock down on the accounts until retirement age I assume means 591/2 years now, yet it will not be long before they change that too-possible to say 65. Then 66, then 69-70 etc like Social Security.
The better question is how many millions of Americans from all social classes have been able to make ends meet these last couple of years because they had a 401k account prior?
I have read countless articles on folks having to draw out money or close out completely their 401k or IRA knowing they still had to pay a 10% Excise Tax.
Either way the government gained 10% while millions struggled to keep a roof over their heads and food on the table. Not everyone can get food stamps or welfare-why-because they have money in a savings account called a 401k or IRA!
However, most folks would rather support themselves & pay the 10% penalty if they have it- I believe-that's why they saved for a rainy day in the 1st place. It's the governments rules that hurts them from doing so!
Robbing future tax collections to take them away today and compromise long term savings. Only the genius's we have on Capitol Hill would come up with this one.
As a CPA this will effect the lower to middle class not the 20/20 plan but rather if the high earners or owners of the company can't get their benefit they as some one in the article said will not set up a plan nor contribute to one.
In my experience the main reason a small businessman set's up a pension plan for his employees is because of his ability to put aside tax free monies for his retirement, unfortunately no benefit for the owner no plan for the employees.
It is not fair, some may even consider it greedy or selfish but it is reality.
Most Americans do NOT put more than $20,000 or 20% of their income away. Why because they simply can't afford to. The only people that can for the most part are the wealthy. The 20/20 rule sounds very reasonable. However they also need to treat the proceeds as capital gains then not ordinary income. It makes no sense. They also need to raise the capital gain rate for anyone with a Gross Income over $250,000. I'm tired of see someone take home $900,000 in a year and pay something close to $13,500 in Federal Taxes not subject to FICA. In 2010 a married couple filing joint that with an adjusted gross income of $84,000 would have to pay $13,369. If you're not married you get hit with the singles rate and you would have to pay $17,236. This is not including the roughly 7.5% you've already had to pay in Social Security and Medicare. Lets address this! The rich will always invest. They will not simply stuff $1,000,000 under the mattress.
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