Rethinking incentives for saving in tax-deferred accounts
As Congress searches for ways to generate revenue to reduce the burgeoning federal deficit and debt — and possibly fund a broad overhaul of the tax code — retirement income policy could be a focus on Capitol Hill.
The latest manifestation of the trend is the Obama administration's budget proposal, which contains several initiatives aimed at reforming retirement savings tax incentives.
Tax breaks for contributions to employer-sponsored retirement plans, such as 401(k)s, and individual retirement accounts are among the most costly annual tax expenditures — totaling about $368 billion in lost revenue between fiscal years 2012 and 2016, according to the congressional Joint Committee on Taxation.
Retirement savings tax incentives may become a mouth-watering target for lawmakers, spurring advocates to mount a spirited defense.
Add to the mix a pending re-proposal of a Labor Department rule that would expand the definition of “fiduciary” as it applies to providers of advice about retirement products, and the retirement savings conflict intensifies.
“This is the most active time I've seen in 20 years in terms of retirement policy issues,” said Brian Graff, chief executive of the American Society of Pension Professionals and Actuaries.
During her visits with members of Congress and their staffs, Diane Boyle, vice president of federal government relations for the National Association of Insurance and Financial Advisors, hears consistently that no tax policy is sacred.
“There's a need for revenue, so the threat [to retirement savings incentives] is still there,” Ms. Boyle said. “I can't tell you the number of offices we've been in where they've said, "Everything is on the table.'”
BROAD TAX REFORM
Retirement savings tax breaks are most likely to be in play if Congress embarks on broad tax reform. Such a massive undertaking was last accomplished in 1986, after several years of effort.
House Ways and Means Committee Chairman Dave Camp, R-Mich., and Senate Finance Committee Chairman Max Baucus, D-Mont., both have said they're committed to overhauling the tax code.
Mr. Camp has issued discussion draft proposals on small-business and investment taxes. Mr. Baucus recently announced that he will retire in 2015, saying that the decision to forgo a re-election campaign will give him more time to devote to tax reform.
But big obstacles remain and are highlighted by the budget blueprints the House and Senate passed last month. The nonbinding outline in the Republican-majority House emphasized spending reductions without any tax increases. The Democratic-majority Senate passed a budget resolution that included nearly $1 trillion in tax increases.
“There's still a huge gap between what each side wants to accomplish on tax law,” said Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc. “The future of any comprehensive tax reform seems limited right now.”
The desire to overhaul tax policy not only has to come from Capitol Hill but also from the other end of Pennsylvania Avenue.
“Absent the White House really committing to tax reform, I don't think it moves in the short term,” said Ann Combs, principal for government relations at The Vanguard Group Inc. and a former assistant labor secretary for employee benefits security.
She added that prospects could change if an agreement this summer to raise the debt ceiling includes a timetable for broad tax reform.
Still, it may take until 2014 for an overhaul to become a reality. But advocates are working hard now to protect retirement savings incentives.
The main point they're making to lawmakers is that the tax breaks for contributions to retirement plans are deferrals, not deductions. The taxes saved when workers put money into a plan will be paid by retirees when they make withdrawals.
"REVENUE DEFERRED'
“It's not revenue lost; it's just revenue deferred,” said Cathy Weatherford, president and chief executive of the Insured Retirement Institute. “For almost two years, we've been on the Hill emphasizing the importance of tax deferrals.”
The discussion of retirement income reform has been stoked by President Barack Obama's budget proposal. It calls for limiting tax deductions to 28% for wealthy Americans and ending tax-favored contributions to individual retirement accounts once the saver accumulates $3.4 million in the account.
Aimed at the wealthy, it could wind up undermining employer-based programs, according to Mr. Graff.
“We think it's a plan killer,” Mr. Graff said. “When you hurt the business owners, it results in a reduction of benefits for the workers.”
Another development for which retirement savings advocates are bracing is the re-proposal of the Labor Department's fiduciary-duty rule, which most of them are expecting in the fall. It likely will apply to rollovers from 401(k) plans to IRAs and to advice surrounding IRAs. The possible permutations of the rule are already causing indigestion.
“We believe it would be a bad result if participants are precluded from being able to work with advisers and providers they've grown to trust,” Mr. Graff said.
With the activity swirling around retirement policy, advocacy groups will be making treks to Capitol Hill for months to come.
