The executive director and CEO of the American Society of Pension Professionals & Actuaries is speaking out against The Brookings Institution's "15 Ways to Rethink the Federal Budget" because it would hurt the small businesses who sponsor 401(k) plans for their employees.
Brian Graff said that the Brookings Hamilton Project proposed placing a 28 percent cap on the rate at which deductions and exclusions related to retirement saving reduce a taxpayer's income tax liability.
"Because the tax incentive for retirement savings is a deferral, not a permanent exclusion, the proposal would more accurately be described as double taxation of contributions to retirement savings plans for anyone with a marginal tax rate of over 28 percent," said Graff.
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"You won't expand coverage by penalizing small business owners for offering a 401(k) plan. Retirees already pay ordinary income tax on distributions from retirement savings plans. If this proposal went through, a small business owner in the 39.6 percent bracket would pay an 11.6 percent tax on contributions made to the 401(k) plan today, and pay tax again at the full rate when they retire."
The Brookings paper acknowledged that the double taxation could cause some individuals to put their savings somewhere other than a 401(k) plan, but what it failed to acknowledge is that when the person who has been taxed twice is a small business owner, that small business owner may decide not to offer a 401(k) plan to employees.
"ASPPA strongly supports expanding coverage through proposals such as automatic enrollment IRAs. But we think those proposals should be a step up for workers who have no access to workplace retirement savings. Not a step down for workers that had a 401(k) plan before their employer got hit with a double tax on their own 401(k) contributions," he said.
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