Senate Eyes Tightening Retirement Tax Incentives

Lots has been written, of late, on the possibility of Congressional action on the tax reform front this year.  All of the recent Obama scandals (and the tendency of Congress to go on vacation every other week) may torpedo these plans.  In any case, it is instructive to keep an eye on how the thinking is evolving – like some of the thoughts recently expressed (May 23) by the Senate Finance Committee Staff in their memo entitled:  “Economic Security:  Health, Retirement, Life Insurance, Fringe Benefits and Executive Compensation” which contains some troubling narrative.

Noting that under current law, individuals have three sources of savings for retirement (Social Security, employer-sponsored savings vehicles, and individual savings) the staff notes that “the tax benefits for retirement savings are one of the largest of all individual tax expenditures,” which is bureaucratese for the notion that this is an area ripe for tightening up – increasing taxation, in other words.  The staff therefore goes on to suggest Senators “think about” limiting or eliminating tax preferences for retirement saving, to include:

  • Significantly reduce or repeal all tax expenditures for retirement savings and replace with automatic enrollment or expanded Social Security benefits.  (The exact wrong prescription, in our book, given the present dismal savings patterns of most Americans.)
  • Reduce limits on tax-preferred contributions to retirement plans to, for example, $14,850 for defined contribution plans and $4,500 for individual retirement accounts, or to a percentage of taxpayer’s income.  (Equally small-minded!)
  • Cap the value of deductions and exclusions for defined contribution plans to 28 cents per dollar contributed.  (FY 2014 Obama budget proposal, by the way!)
  • Disallow further tax-preferred contributions to defined contribution or defined benefit plans once the total value reaches the equivalent of, for example, $3 million or roughly $200,000 annual annuity at today’s interest rates. (Another FY 2014 Obama small-minded budget proposal, based on the notion that if enacted, it could raise $5 billion over ten years.)
  • Eliminate higher “catch up” contribution limits for those age 50 years or older.
  • Require inherited IRAs to be distributed within five years.
  • Repeal non-deductible IRAs.

To be fair, the Staff musings do include some other considerations for Senators,

including some which would be designed to enhance existing retirement savings incentives.  But we’ve all seen the stats on how little, particularly we “Boomers” are saving, not to mention how much even less our progeny are inclined to stash away, how ridiculous is it to even suggest reducing or eliminating the present law encouragement to save?  Who’s going to pay for all of us paupers who enter retirement broke?  You guessed it.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

 

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