Protect Your Retirement

Posted by Maria T. Hurd, CPA

With the fiscal cliff negotiations behind us and impending federal tax reform legislation, Congress will now turn its attention to the debt ceiling and federal spending. ASPPA believes that tax expenditures, including the deferral for retirement savings, will be on the negotiating table. Regardless of whether additional revenue is part of deficit reduction, tax reform is on the agenda. Broadening the base to lower the rates means all tax deductions could be curtailed, including deductions for retirement plan contributions. Inevitably, there will be increased Congressional scrutiny of the employer-based retirement system tax incentives. Many of the proposed changes, including proposals to reduce the deduction for employer contributions to retirement plans and limit the tax benefit of deferrals for long-term retirement savings, could have a devastating impact on the employer-sponsored retirement plan system. Devastating, because the single most important factor in determining if a worker is saving for retirement is whether there is a plan at work. In fact, participation rates by moderate income ($30,000–$50,000) workers who have an employer plan is 71.5% while only 4.6%, less than 5%, of workers save for retirement if they don’t have a workplace plan.

The defined contribution plan system is significantly more progressive than the federal income tax system. For example, 62% of the tax incentives benefit households with Adjusted Gross Income less than $100,000. While tax reform and deficit reduction are necessary in these tough economic times, any proposal that reduces tax incentives for 401(k) or other workplace retirement plans could have a significant negative impact on the retirement savings of millions of middle-class workers. Over 60 million American workers are covered by a 401(k) plan, or similar plans called 403(b) or 457(b) plans. Specifically, 80% of 401(k) participants come from households making less than $100,000 in income. An analysis by the Employee Benefits Research Institute shows that reduced limits for 401(k) plans would result in lower account balances at retirement for all income groups. In fact, younger workers in the lowest income quartile could expect a 14% reduction in their account balance at Social Security normal retirement age.

Coverage statistics based on all workers claim that current tax incentives have failed because of low coverage, but the retirement plan system was designed to cover full-time workers and data shows that 78% of full-time workers are covered by a workplace retirement plan. Due to the increased use of these plans, retirement savings now represents over 65% of American families’ financial assets. Additionally, the tax incentives for 401(k) plans are different than other deductions, because plan participants are subject to income tax when they take money out of the plan.  The tax incentive is simply a deferral of the tax to a later date, not an elimination of the tax revenue.

As all TV networks focus on Washington this week, if you are interested in bringing retirement savings to the top of the tax-reform agenda, visit Save My 401(k) and send a letter to your Representatives urging them to protect retirement savings by voting against any measure that would reduce tax incentives for retirement savings.

For a more fun twist to the seriousness of this important initiative, play the “Protect my Piggy” game on the site. Have fun helping to protect your retirement security.