When President Obama advances his reported proposed 2015 fiscal budget next week, he'll propose capping some existing tax advantages for employer-sponsored plans.
By limiting the value of tax deductions, defined contribution exclusions and IRA deductions to 28 percent of income, the Obama administration hopes to create $1 billion a year in new tax revenue.
The reduced 28 percent limit on deductions would affect the retirement savings of individuals earning more than $183,000 and couples earning more than $225,000.
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The proposals, which hope to address systemic budget deficits by extending tax exposure of high earners, is said to hope to direct more tax preference for retirement savings to low and middle-income people, ideally in an effort to provoke them into the habit of saving.
The relationship of one earner's limited deductions to another's rate of saving is unclear, say critics of the proposal.
Others say that just because limits to deductions is advanced in a budget does not necessarily mean that those specific limitations will be passed by Congress, which, given its current climate, will no doubt struggle with much of what the administration's budget requests.
So-called "catch-up" investors in 401(k) programs could be most affected by reducing deduction limits. The average 401(k) and IRA balance for people 55 and over is just $42,000. As people race to beef up their accounts, and take advantage of higher contribution levels ($23,000 for employees over 50), such reductions in tax benefits would obviously increase their tax exposure, and potentially limit deferrals into retirement accounts.
Some worry this could disrupt the country's fragile retirement prospects.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
