The federal government is eyeing retirement plans as a possible source of revenue to close the $1 trillion deficit. The total value of Americans’ retirement assets stood at $17 trillion at the end of September. That’s $17 trillion of untaxed assets! If the government could get a small piece of those assets, it would go a long way towards closing the budget gap. There have been proposals for getting at the assets already saved, but none have received much backing so far. However, discussions on how to slow the flow of dollars into these plans have been gaining support.
Here are two of the most popular proposals:
20/20 cap proposal – The National Commission on Fiscal Responsibility and Reform recommends limiting the employee/employer contributions to 20 percent of an employee’s annual compensation, not to exceed $20,000, whichever is less. The American Benefits Council says the highest levels ($51,000 in 2013) can only be reached by business owners and higher-paid employees. Most middle income taxpayers would not be affected by the cap.
Flat-rate refundable tax credit – Under this proposal, both employee and employer contributions to qualified plans would no longer be excluded from income subject to tax. Traditional IRA contributions and any employer/employee contributions to 401(k) plans would be treated as taxable income. All qualified employer and employee contributions would be eligible for a flat-rate refundable tax credit. The credit would be deposited directly into the retirement savings account of the employee.
Either of these proposals could be considered as part of an overall tax reform plan. In order to flatten tax brackets, deductions will need to be pared. The biggest deductions are retirement plan contributions, the state & local tax deduction, and mortgage interest. It may be impossible to make any significant change to the tax code without trimming one or more of these deductions.