The Employee Benefit Research Institute’s 2013 RetirementConfidence Survey recently found that 82 percent of workersparticipate in an employer-sponsored retirement plan, and anadditional 8 percent have money in a plan they don’tcontribute to. With so many people covered by 401(k)s, it’s clearthat the impact of changes to their tax treatment could besubstantial.

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Protecting the tax incentives built into 401(k) plans is one ofthe biggest goals for The American Society of Pension Professionalsand Actuaries (ASPPA). Unfortunately, tax changes that affectbusiness owners could dissuade some employers from offeringplans.

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Brian Graff, executive director for ASPPA, spoke with AdvisorOneat the ASPPA 401(k) Summit on March 5 about the potential impact ofchanging those incentives. He referred to the BrookingsInstitution’s proposal that cappedretirement savings deductions at 28 percent. Becausebusiness owners who offer their employers 401(k) plans are alreadytaxed on contributions made to the plan and would be taxed againwhen they take a distribution, the proposal effectively calls for adouble tax on retirement savings, he said. “No one likes taxes tobegin with,” he said, so why would anyone want to pay twice?

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Such a move could lead to declining savings rates among workers.Graff pointed out that investors are 14 times more likely to saveif they have a plan through their employers than if they have toget an IRAon their own

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Even so, since they allow investors to build tax-deferred incomeuntil distribution, IRAs are still valuable tools for retirementsavings. “If you’re already maxed out [in your annual 401(k)contribution], it’s a great way to do supplemental savings,” Graffsaid.

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Graff reminded us that Roth IRAs can’t be claimed as a deductionlike traditional IRAs. He added that although the Roth conversionis not a “popular item” due to the subsequent increase in taxrates, the charitable rollover was extended in the AmericanTaxpayer Relief Act of 2012 for rollovers made before Feb. 1. “It’sa way to make a contribution and avoid limits on items that applyin 2013,” Graff added.

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Annuities’ tax-deferredgrowth is one of the biggest draws for investors. A reportreleased in March by the Insured Retirement Institute found almostthree-quarters of boomers consider tax deferral an important factorin picking any retirement product, and about 20 percent saidit was their primary reason for owning an annuity specifically.

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“One of the things annuities do is allow savings to growfaster,” Cathy Weatherford, president and CEO of the InsuredRetirement Institute, told AdvisorOne on Friday. They’re especiallyhelpful for investors who have contributed the maximum to their401(k) allowed by the IRS ($17,000 in 2012 and $17,500 for 2013),she added, “you can add additional savings in a tax-deferredway.”

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Weatherford pointed out that annuities are useful for people whodon’t have access to other retirement plans. “Four in 10 workersdon’t have access to a defined contribution retirement plan throughtheir employer,” she said. “Using an annuity can help them getfurther down the road.”

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Defined benefit plans have “gone the way of the dinosaur,” shesaid. Now employees have to take responsibility for their ownretirements, and they’re using tax deferral as a way to “shore up”their savings. For employees who take assets out of theiremployer’s plan when they retire, “an annuity can be helpful indriving lifetime income” in a way that’s similar to what they wouldhave gotten from a defined benefit plan.

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“Our research has shown that Americans value tax deferral forretirement so they can save and build their nest egg without payingtaxes on it while they’re still working,” she said. “Advisors haveto remain vigilant, especially at a time when their clients arebecoming more responsible for their retirement.

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“It’s not that the federal government never gets that money.It’ll be taxed at distribution. It’s just a delayed entry intofederal coffers.”

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For more tax stories and advice, check outAdvisorOne’s 20Days of Tax Planning Advice for 2013home page.

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