The shape of 401(k) plans may be altered if discussions move forward on reducing or completely eliminating tax deductions for retirement plans.
That’s according to Pentegra Retirement Services, a White Plains, N.Y.-based provider of retirement plan offerings.
“The net effect on over-50 employees, in particular, could be deeply devastating. But everyone’s retirement savings are at risk if 20/20 or other measures taken to reduce the deficit are implemented,” said Rich Rausser, senior vice president of client services for Pentegra.
Rausser said the money an employee puts into a 401(k) might be subject to taxation before they invest it in the plan.
“Future contributions might not grow on a tax-deferred basis. All itemized deductions, including those for retirement plans, could be capped. Even the currently tax-free earnings in a Roth IRA could be taxed,” Rausser said.
Tax breaks for 401(k) and similar retirement savings plans add up to $100 billion a year and reportedly will cost the government an estimated $429 billion from now to 2017, Pentegra said.
According to the Employee Benefit Research Institute, more than 70% of workers earning $30,000 to $50,000 participate in their employer’s 401(k) plans, Pentegra said.
Rausser said under current law, employees under the age of 50 can contribute up to $17,500 in their 401(k) plans in 2013, while those aged 50 and older can contribute up to $23,000.
Under the terms of a new proposal, which is a recommendation of the Bipartisan Policy Center’s Debt Reduction Task Force known as the “20/20 Plan,” an employee and his employer together would be permitted to contribute up to $20,000 or 20% of the employee’s salary, whichever is less, to a 401(k) account, Rausser said, adding this includes the employer’s matching funds.
Rausser said the American Society of Pension Professionals & Actuaries, a national organization of more than 10,000 retirement and benefits plans, is against such actions.
“We understand Congress needs to reduce the debt and raise revenue but raiding the tax incentives for 401(k) plans will put American workers’ retirement security at risk,” said ASPPA Executive Director/CEO Brian Graff, in a statement provided by Pentegra.
“Tens of millions of Americans participate in these retirement plans, and 80% of them earn less than $100,000 per year. This is a battle that American workers simply can’t afford to lose,” Graff said.