The Next Big Threat to Your 401(K)

September 21st, 2011

Daily Finance

By: Sheryl Nance-Nash

It’s bad enough the stock market has been beating up on most of our 401(k)s lately. Now, legislators and big thinkers are debating a variety of proposals to reduce the tax benefits of saving in 401(k)-type plans.

One idea being floated would take away the immediate tax deduction you get for your contributions. So if you make $50,000 a year and contribute $5,000 to your 401(k), you’d no longer have the pleasure of seeing your taxable income drop to $45,000.

Right now, Americans are typically taxed once on dedicated retirement accounts: Either you contribute pretax income and don’t pay taxes until you take the cash out — as with your 401(k), for example — or you pay in with your post-tax income, but the money that you withdraw at retirement is tax free — as with a Roth IRA. Under this new scenario, those 401(k) investments could be taxed both before and after taxes, just like your regular investments.

But some things may be sacred. There’s not a high probability that you’ll have to pay taxes on your profits any sooner than you do right now. Say you have $100,000 in your 401(k) and you make $5,000 in capital gains on it. As it stands now, you wouldn’t get taxed on that $5,000 until you withdraw it, and there’s not much chatter that anybody is looking to change that.

So who has the most to lose from the proposals being debated? Low-income workers, says the nonpartisan, nonprofit Employee Benefit Research Institute, because they’re the ones most likely to respond to a loss of the tax break by either cutting their contributions or stopping them altogether.

A Major Disincentive to Save for Retirement

At a recent hearing of the Senate Finance Committee, EBRI Research Director Jack VanDerhei, explained the potential impact.

“As expected, the highest-income workers generally would be the most affected if federal tax limits in 401(k) type plans were lowered,” VanDerhei said in a prepared statement. “But the surprising result we found is that the lowest-income workers would also be very negatively affected, and many report that they would reduce contributions or stop saving in their work-based retirement plan entirely, if the current exclusion of worker contributions for retirement savings plans were ended.”

For instance, VanDerhei said that if workers lost their deduction in 2012 and saw it replaced with flat-rate tax credits — as was recently proposed by Brookings Institution Fellow William Gale — the average reductions in 401(k) accounts at normal retirement age would range from a low of 11.2% for employees now ages 26-35 in the highest-income groups, to a high of 24.2% for employees in that age range in the lowest-income group.

At the hearing, Gale explained his proposal to “reform public policies toward retirement saving by replacing the current deduction for contributions to retirement saving accounts with a flat-rate refundable credit that would be deposited directly into the saver’s account. The proposal would (a) address long-standing concerns in the retirement saving system by improving incentives for most households to participate and by raising national saving, (b) offset pressures created by the current weak economy for households to reduce their retirement saving, (c) help solve the long- term fiscal problem facing the country by raising $450 billion over the next decade in a manner that is consistent with the principles of broad-based tax reform and distributes the fiscal burden in a progressive manner.”

Earlier EBRI analysis of the bipartisan deficit commission’s other proposal to reduce the 401(k) savings caps to either $20,000 a year or 20% of income (the so-called “20/20 cap”) starting in 2012, would most affect the highest-income workers — not surprising, since those who earn more tend to save more using these kinds of retirement plans. However, EBRI also found the cap would cause a big reduction in retirement savings by the lowest-income workers as well. Today, the annual cap is $16,500, with an extra $5,000 allowed for those who are 50 and older.

Would Employers Drop 401(k) Plans?

All the proposed monkeying around with retirement savings plans could be one more nail in the retirement coffin. After all, the number often bandied about for how much money the average American will have at retirement is around $50,000 — hardly enough to live the glamorous life in one’s golden years.

VanDerhei told DailyFinance he’s worried the Brookings proposal might find some support in Congress. “It promises to save the government $450 billion over 10 years, which could look attractive to the [Supercommittee that] is tasked with coming up with a lot of savings between now and Nov. 23.”

Gale is leading the charge to make employers’ contributions taxable and for employees to lose their 401(k) deduction. Instead, he suggests a flat-rate refundable credit of either 18% or 30% that would serve as a matching contribution to a retirement savings account. VanDerhei says this would surely diminish some employers’ willingness to offer 401(k) plans, as well as employees’ desire to participate in them.

Said VanDerhei, in a prepared statement, “Given that the financial fate of future generations of retirees appears to be so strongly tied to whether they are eligible to participate in employer-sponsored retirement plans, the logic of modifying (either completely or marginally) the incentive structure of workers and/or employers to save in a defined contribution plan needs to be thoroughly examined.”

VanDerhei says it’s not a stretch to think that too much tinkering could lead to some companies shutting 401(k) plans down. The consequences would be huge. “When people don’t have 401(k)s, they often don’t save elsewhere for retirement. Anything that will cause a drastic reduction in retirement savings at a time when there are various proposals to decrease Social Security benefits, makes it hard to see how people will have any standard of dignity in retirement.”

Click here for the full report from DailyFinance

Tax Rate Adjustments To Pay for Obama’s Jobs Plan

September 13th, 2011

The Raw Story

By: Stephen C. Webster

The president’s $447 billion plan for tax incentives and infrastructure spending to create new jobs would be paid for by adjusting the tax rates of wealthy Americans, such as hedge funds managers and corporate jet owners, laying the burden of continued economic recovery at the feet of those who’ve seen its only benefits over the last two years.

That’s according to Office of Budget Management Director Jack Lew, who told reporters at the White House briefing room on Monday that several of President Barack Obama’s previous budgetary proposals could be combined to pay for the plan.

The proposals would set tighter limits on individual deductions for single earners making over $200,000 a year and families with combined incomes over $250,000 a year, drawing their exempt income down from 35 percent to 28 percent.

It would also adjust how hedge fund managers’ incomes are taxed and eliminate tax deductions for corporate aircraft. Additionally, all subsidies for the oil and gas industries would be eliminated.

Director Lew said these adjustments would add up to $467 billion over the next decade, covering the jobs bill and wiping an additional $20 billion off the nation’s deficit.

The proposals are not new: President Obama has sought to make these changes in his past two budget requests, and in the Affordable Care Act. They have been repeatedly blocked by Republicans in Congress, who claim that raising tax rates on wealthy Americans would deter them from creating jobs.

However, in this case, President Obama’s proposals are largely made up of Republican ideas such as tax credits for small businesses that hire new workers. It remains unclear how Republicans will be able to use their ostensibly pro-jobs argument to resist their own proposals for creating jobs.

What is clear is that President Obama’s jobs proposals will face stiff Republican opposition in Congress thanks to the path the administration has chosen to secure funding, giving more rhetorical fire to those who say it is intended to support his reelection efforts as much as it is meant to boost the economy.

Still, it leaves the president in a politically strong position, as even the majority of Republican voters support raising the top-tier tax rates, which have been at historic lows since President George W. Bush’s first term.

Obama is also backed up by economic reality: As the president noted in his speech last week, corporate profits have indeed come “roaring back,” up 29 percent just from 2009-2010, yet hiring has not risen in tandem.

Recent polling shows an increased appetite for tax fairness among the American public, with a large majority agreeing that wealthy Americans should pay more to ensure the nation’s economic stability.

When the historic-low tax rates were extended for two more years in 2010 after a political battle that saw Republicans threaten to raise taxes on the poor and middle class, the president promised to make taxing the wealthy part of his reelection campaign.

While it does not directly touch upon the Bush tax cuts, the president’s jobs bill seems to be a clear step in this direction.

Click here for the full report from The Raw Story

Al Franken Working to Stop Big Pharma

October 28, 2009

WalletPop

By Jami Bernard

New legislation introduced by, among others, Sen. Al Franken (D-Minn.), would cut off the federal tax deduction for drug companies that make those “direct-to-consumer” ads, the ones on TV convincing you to pop prescription drugs like candy.

There’s plenty to hate about those ads. They’re ubiquitous, for one thing. They manage to be misleading without being downright untrue. They play into the “a little knowledge is a dangerous thing” category, because you’ve got people self-diagnosing without understanding that, in some cases, the side effects can be worse than the underlying condition. (“Death” is one of those annoying side effects.)
The proposed legislation also runs the risk of a side effect that Franken and his cohorts may have not considered: By yanking the financial incentive to run these ads, what will become of TV’s nightly news shows?

The audience for the nightly news on CBS, ABC and NBC has been shrinking and graying, like laundry that has been through too many spin cycles. The shows cost millions of dollars to produce. A half-hour news program is paid for by eight minutes of advertising.

Regular news watchers already know that most of those eight minutes are taken up by men with erectile dysfunction getting lucky after taking Cialis, or women being gently lulled to sleep by the Lunesta moth.

Drug companies currently get a tax break to make and market that kind of stuff. They’re called “direct-to-consumer” (or DTC) ads, but the consumer is only a means to an end.

The ads routinely beg you to “ask your doctor” for a prescription. It’s the doctor those ads are after, not you. They’re speaking to those doctors through you, much the way supermarkets put chocolate-coated “breakfast cereal” on the lower shelves to be at eye level with the kiddies. “Ask your doctor” is the same as “throw a tantrum for your mother until she buys you what you want.”

I can understand Franken’s point — that Big Pharma shouldn’t be making money from using consumers as pawns to achieve their profit margins. But print and TV journalism is already in big trouble.

According to Consumer Reports, drug companies spent $5.375 billion on advertising in 2007. While every dollar spent advertising osteoporosis drug Reclast resulted in just six cents of sales, every dollar spent advertising cholesterol drug Lipitor brought in $59.78 in sales. Without the tax break, you can be sure they’ll reconsider how much airtime to buy on the nightly news.

Without those ads, the news shows will have to cut costs. Soon, they’ll be lucky to maintain a news bureau in midtown Manhattan, let alone Afghanistan.

On one hand, the death of print and TV journalism means a loss of some of the standards of reporting that have not yet become de rigueur on the Web (such as sourcing and fact checking).

On the other hand, the explosion of DTC advertising from drug companies has resulted in lot of people overmedicating — why, just the other day, my leg twitched and I just knew it had to be Restless Leg Syndrome, not the six-shot venti Americano I had at 5 p.m.

I’m not saying Franken should withdraw the proposed legislation. I’m asking a general question that so far has no answer: Why is it that the consumer always gets the shaft?

Click here for the full report.