Budget Proposal Impacts Retirement Plans

True to his word, President Barack Obama’s budget proposal looks to increase taxes on the rich and create incentives for the middle class, and people in both camps …

True to his word, President Barack Obama’s budget proposal looks to increase taxes on the rich and create incentives for the middle class, and people in both camps could face changes in their retirement options and plans. Some experts disagree with the plan because it looks to increase taxes that could convince small-business owners to stop offering employee retirement plans to offset higher tax liability on itemized deductions like employer-sponsored health insurance and retirement contributions. On the other side of the coin, however, the proposal looks to make retirement plans more transparent to employees as well as give them more plan options. For more on this continue reading the following article from TheStreet.

Within the pages of President Barack Obama’s fiscal 2013 budget proposal are several initiatives that could have a direct impact on your retirement strategy, including deduction limits for high-income 401(k) investors and a mandate for employer-offered IRA plans.

Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, lambasted the president’s proposals to limit the tax benefit for retirement savings for families earning over $250,000 as a "double tax on contributions" and "bad policy based on bad math."

The budget seeks to reduce the value of itemized deductions and other tax preferences. It would limit the tax rate at which high-income taxpayers can reduce their tax liability to a maximum of 28%, affecting only married taxpayers filing a joint return with income over $250,000 and single taxpayers with income over $200,000. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer-sponsored health insurance; and retirement contributions.

Graff explains that under current law, there is already a $250,000 cap on compensation that can be used to calculate contributions to 401(k) plans. The proposal effectively doubles down on this limit for 401(k) plans and "takes an ax to the tax incentives that encourage small-business owners to offer these types of plans at work."

"Unlike other targeted tax incentives, the tax break for retirement savings is a deferral, not a permanent write-off," Graff says. "Under the president’s budget, these taxpayers wouldn’t just lose a current tax break, they would actually be penalized for saving — paying taxes now and taxes later. This will discourage small-business owners from setting up or maintaining retirement savings plans for their employees. Workers that lose workplace retirement savings plans will be the ones that really pay for this misguided proposal."

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"Penalizing small-business owners that make over $250,000 who contribute to 401(k) plans won’t balance the budget, but it should and will make them think twice about putting in a plan to begin with," he added.

Other retirement proposals contained in the budget include "a system of automatic workplace pensions."

Under the proposal, employers who do not offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account. Employees may opt out if they choose and businesses with 10 or fewer employees would be exempt. Employers would also be entitled to an additional credit of $25 per participating employee — up to a total of $250 per year — for six years.

The budget also increases the maximum tax credit available for small employers establishing or administering a new retirement plan to $1,000 per year from $500. This credit would be available for four years.

The Obama administration, through the U.S. Departments of Labor and the Treasury, has also announced executive actions designed to "expand transparency in the 401(k) plan marketplace" and "broaden the availability of retirement plan options."

What that means for investors is that, by July 1, service providers will be required to provide employers sponsoring pension and 401(k) plans with detailed information about administrative and investment costs.

"This rule, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans," Secretary of Labor Hilda L. Solis said in a statement. "When businesses that sponsor retirement plans and the workers who participate in those plans get better information on associated fees and expenses, they’ll be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement."

The Treasury Department proposal will "reduce regulatory burdens and make it easier for retirees" to choose lifetime income options, a potential boost to the increasingly popular use of annuity products.

It encourages partial annuity options that go beyond the traditional "cash or annuity" decision many face upon retirement. The proposed regulation changes a regulatory requirement to make it simpler for defined-benefit pension plans to offer combinations of lifetime income and a single-sum cash payment.

Another proposed regulation expands on the combination approach by removing a regulatory impediment to buying a deferred "longevity" annuity. This change would "make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy," the Treasury Department statement says.

The rulings also clarify that employers can offer their employees the option to use 401(k) savings "to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens."

This article was republished with permission from TheStreet.


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