Experts are saying that the budget for 2015 proposed by Pres. Obama will be an absolute disaster for millions of Americans who are not fully prepared for retirement because it would reduce the tax incentives employers now get for offering 401(k) retirement plans to their employees.
The fact is, the retirement situation in United States is an ugly mess. Neither political party has come up with a solution to a grossly underfunded Social Security which, as it stands right now, is headed for insolvency. Most corporations got rid of their pension plans years ago because they simply couldn’t afford them anymore, and pension plans of most state governments are so broke that many cities and municipalities across the country are in complete disarray.
Right now the 401(k) is the largest retirement savings vehicle in the country, a plan that allows employees to have a portion of their paycheck automatically deducted and put into a retirement plan. The amount they put into their 401(k) is not taxed until it’s withdrawn during their retirement years.
While it is difficult for many American consumers to save, the beauty of the 401(k) is that the money put into it is taken out of a person’s paycheck automatically, before they see it and have a chance to spend it.
While the new budget proposal probably won’t affect you nearly as badly if you work for a Fortune 500 company and have a decent 401(k) plan already in place, if you are one of the millions of Americans who work for a smaller company it may well be a huge blow to your retirement plans and future financial independence.
The reason is simply that the new budget would reduce tax incentives for small business owners to first establish and then maintain a 401(k) plan. Even worse, higher income earners would be limited to 28% when it comes to tax deduction time, even if the bracket that their current income puts them in is much higher. So, for a person who is in the highest marginal tax bracket (39.6%) their tax deduction would only go as high as someone who is in the 28% tax bracket. When they withdraw the money during retirement, they would also be fully taxed at their current rate even though they were only able to receive a partial deduction right now.
This amounts to double taxation because they would not be able to contribute as much today and thus be taxed on that money as well as being fully taxed when they withdraw it in the future.
Since most high income taxpayers are business owners themselves, the question must be asked about whether they will want to start a retirement plan that can potentially hurt them both personally and professionally.
The simple, unavoidable fact is this; more Americans are now working for small businesses than for larger corporations. These people deserve the same retirement incentives as the people who work for a Fortune 500 company. The shame is that, under Obama’s new budget, they’re going to be deprived of a very valuable tool to do so.