Hold onto your hats: A proposal coming from the White House could impact your 401(k) and not in a good way. President Obama plans to ask Congress to reduce tax benefits for 401(k) investors, particularly higher earners. And the proposal doesn’t stop there. The president also wants to limit the value of all tax deductions and IRA deductions to 28 percent of income. Catch-up investors for retirement would be hardest hit by these rules if they were to become law.
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Experts say that households caught in the crosshairs would be singles earning $183,000 or more and couples earning $225,000 and more.
The proposal, which is sure to reduce savings if it becomes law, comes even as Americans are pitifully under saved for retirement. According to Boston College’s Center for Retirement Research, the average 401(k) and IRA balance for people over 55 years of age is just $42,000. What’s more, just five percent of the roughly 60 million 401(k) plan participants contribute the maximum amount to their 401(k) of $17,500 for people under 50 and $23,000 for people 50 and older.
“You don’t strengthen the caboose by weakening the engine; it’s a bizarre point of view,” says Ric Edelman, a financial advisor and author of “The Truth about Retirement Plans and IRAs. “We need to be creating incentives for people to save for retirement, not putting ceilings on them to discourage them from saving.”
What’s surprising is that the administration would look to raise the tax hit on retirement savings rather than increase it. The administration says that wealthier Americans will save for retirement regardless of whether they get tax breaks for doing so, but in many parts of the country, the earnings levels that are targeted -- $225,000 for a couple, for example – aren’t high wage earners, but middle class earners.
What’s more, the President’s proposal has the possibility of reducing retirement options for people in all wage categories, if small business owners decide to drop company 401(k)s, rather than deal with the changes. “If you have rich people without incentives to save, they are going to kill their retirement plans at work which means the lower-paid workers won’t have a retirement plan to contribute to at all. So, that’s a real backwards concept,” Edelman says.