While attending a terrific symposium recently on the retirement challenges women face, I came away with a stark realization: Washington has a bull’s-eye on every American’s 401(k).
The Women’s Institute for a Secure Retirement (known as WISER), a nonprofit dedicated to improve the long-term financial security of women, had brought together administration officials, the savviest Capitol Hill insiders and retirement analysts working at financial services firms and think tanks.
Ignoring the Retirement Crisis
Speaker after speaker described how so many Americans – women in particular – lack the financial resources needed to retire, what Sen. Tom Harkin, a Democrat from Iowa, called “one of the most underreported crises” in America. We heard scary statistics, including that 48 percent of Americans have less than $10,000 in savings.
You might think this would be a moment when Washington would look for ways to encourage Americans to save. But “it’s not a good time to talk about incentives for savings when everyone is trying to cut spending,” Sen. Ben Cardin, a Democrat from Maryland, said at the retirement symposium.
The recurring underlying theme was this: Don’t be surprised if Congress and President Barack Obama make it harder to save for retirement starting in 2014.
Nutty, isn’t it?
Why would Congress and the president target retirement savings plans? Especially when they’re so highly valued by the American public. In a new Wells Fargo/Gallup Investor and Retirement Optimism Index survey of 1,024 adults with investable assets of $10,000 or more, 69 percent said it was extremely or very important that the president and Congress find ways to financially encourage every company to offer a 401(k) savings option and to financially encourage all Americans to participate in their employer’s 401(k) savings option. Similarly, 67 percent of those surveyed said it was important that leaders seek ways to enhance the role of the 401(k) as a retirement savings investment.
The answer, to paraphrase bank robber Willie Sutton, is because that’s where the money is.
Trimming Retirement Plans to Shrink the Deficit
The tax breaks for 401(k) and similar retirement savings plans add up to $100 billion a year and will cost the government an estimated $429 billion from 2013 to 2017. That’s more than the mortgage interest deduction.
These plans are also tempting targets politically, because 80 percent of their benefits go to the top 20 percent of earners, according to the Tax Policy Center. That’s why liberal-leaning groups, like the Pension Rights Center, say the plans’ tax breaks should be trimmed.
Andrea Coombes, the retirement columnist for The Wall Street Journal’s Marketwatch site, recently wrote: “Some say it’s inevitable lawmakers will at least look at limiting the tax benefits of such plans.” Certain employers may stop offering 401(k)s if benefits are cut for higher-earning employees, she added.
It’s a little early to say exactly how 401(k)s might be squeezed for their tax juice, but one proposal gaining ground is what’s known as the 20/20 plan. It was one of the deficit reduction proposals from the Simpson-Bowles bipartisan commission of 2010 and a recommendation of the Bipartisan Policy Center’s Debt Reduction Task Force.
A Proposal That’s Gaining Steam
Here’s how 20/20 would work:
Under current law, employees will be allowed to contribute up to $17,500 in their 401(k) plans in 2013; up to $23,000 for people 50 and older. But under 20/20, you and your employer together would be permitted to contribute up to $20,000 or 20 percent of your salary, whichever was less, to your account; that figure includes your employer’s match.
Brett Goldstein, director of retirement planning for American Investment Planners, a financial advisory firm in Jericho, N.Y., says this could reduce contributions by 65.21 percent for someone over 50 earning $50,000 a year. (The math is complex, but trust me, Goldstein’s right).
There are other ways retirement savings plans could get it in the neck: The money you put into a 401(k) might be taxed before you invest it in the plan. Future contributions might not grow tax-deferred. All itemized deductions, including those for retirement plans, could be capped. It’s even possible that the earnings you’ve built up tax-free in a Roth IRA might get taxed.
A Petition to Protect the 401(k)
All of these rumblings have led the American Society of Pension Professionals and Actuaries to launch the “Save My 401(k)” online petition, which it also calls “Protect My Piggy.” (I’m no Beltway pundit, but I don’t think using the word “piggy” will be endearing to deficit hawks in D.C.) The website for the grassroots campaign lets you email your concern to your members of Congress.
“We understand Congress needs to reduce the debt and raise revenue, but raiding the tax incentives for 401(k) plans will put American workers’ retirement security at risk,” says Brian Graff, the society’s executive director and chief executive.
2 Tips for Retirement Savers
With retirement plans a likely target, I have two pieces of advice:
1. Invest as much as you can next year in your 401(k) or similar employer-sponsored plan if you have one. If you can invest in an IRA, do it; the contribution limit for traditional and Roth IRAs in 2013 will be $5,500; $6,500 if you are 50 or older.
2. If you work for an employer with a 401(k) plan that offers advice, pay attention to it. Writing in the Schwab Talk Blog, Catherine Golladay says that a study of employees in plans served by Charles Schwab found that those who follow its 401(k) investment advice save more, are better diversified and are better equipped to handle inevitable fluctuations in the market. Planning for your eventual retirement is tough, so I say: Why not benefit from smart insights from professionals, when they’re there for the taking?
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- Year-End Tax Planning in the Age of the Fiscal Cliff
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