The loss of retirement savings incentives in President Barack Obama's $3.8 trillion budget proposal may make high-income earners flinch, but there's good news for workers at small companies that don't currently have a retirement savings plan.
The president is bringing back a proposal for the automatic IRA, along with a series of tax incentives for small businesses to begin using the plans.
Under the proposal, businesses without a plan would be required to enroll their workers in a direct-deposit IRA compatible with existing direct-deposit payroll systems. Workers would have the opportunity to opt out if they preferred.
Businesses with 10 or fewer workers would be exempt from the requirement.
Mr. Obama also is calling for an increase in the maximum tax credit available to small employers setting up new retirement plans, to $1,000 per year from $500. The credit would be available for four years.
Higher income Americans may not find much to like in Mr. Obama's 2013 budget.
Individuals earning at least $200,000 and families making more than $250,000 would pay more in taxes. Rates on dividends would jump to 39.6%, from today's rate of 15%, and a 30% minimum tax would be imposed on individuals with at least $1 million in annual income.
The proposal also takes aim at the tax deductions higher-income families enjoy, including those that apply to retirement contributions. Mr. Obama proposes capping the value of itemized deductions and other tax preferences at 28% for families with income over $250,000. By removing the tax break for retirement savings, the administration would shave $584 billion from the nation's deficit over 10 years.
That provision was met with fiery resistance from the American Society of Pension Professionals and Actuaries, which claimed that the removal of the incentive not only would punish higher-income workers for saving but hit them with a double tax — a surcharge on the contributions to the plan and an income tax at the time of the money's withdrawal.
“If I'm already taxed at the 35% rate, but I'm only getting a 28% deduction, then I'm paying a 7% surcharge on my retirement savings contributions,” said Brian Graff, ASPPA's CEO.
“And then I'll be paying taxes again when the money comes out. People really don't want to be double-taxed.”
Observers noted that the proposal would be bad news for business owners, as they'd have less incentive to open the plans in the first place.
“It makes the incentive smaller for the business owner,” said Randolf H. Hardock, a partner at Davis & Harman LLP. “Often the trade-off for the small-business owner is the cost in fees and administrative costs, how much the employees want it and fiduciary responsibilities in setting it up. But what's in it for the employer?”
Were those provisions to go through, more investors and em-ployers would take a closer look at Roth IRAs and Roth 401(k)s so that after-tax dollars could go toward savings.
dmercado@investmentnews.com
