While many changes may be forthcoming, Brian Graff, CEO of American Retirement Association, was very glad that the importance of retirement savings was specifically mentioned when the tax proposal was unveiled.
Although the headlines continue to focus on “tax reform,” it’s really all about cutting taxes, both individual and corporate. However, when it comes to tax reform, there are “winners and losers”—with a $20 trillion debt and Congress wanting a way to be “revenue neutral”—i.e., finding a way to offset projected loss in revenue due to decreased tax rates.
Will retirement accounts be in the budgetary crosshairs again? It’s more than possible. According to the nonpartisan Joint Committee on Taxation, tax-advantaged defined contribution (DC) plans and IRAs will cost the Treasury $670 billion in foregone revenue between 2016 and 2020.
Government rules deem tax-deferred retirement accounts (e.g., DC plans, IRAs, etc.) to be foregone revenue due to an accounting window of 10 years that factors revenue and expenditures. Since payment of retirement benefits generally occurs outside this window, from a budgetary perspective, taxes are lost forever—even though the government eventually recovers the revenue as retirement accounts are taxed as ordinary income rates in the year of distribution.
Unfortunately, retirement policy and tax reform have rarely been in lockstep. Instead, popular tax-advantaged accounts collectively have been used a short-term revenue enhancer. The Investment Company Institute, for example, reports that individuals have saved an estimated $7 trillion in DC plans and another $7.9 trillion in IRAs.
As Graff said, “This is the beginning, not the end, and we need to remain vigilant. Let’s remember that it’s Congress that writes the tax law, not the president. This show is far from over.”
Stay tuned.
Brian Dobbis is responsible for managing IRA business for Lord Abbett & Co., an independent, privately held investment management firm. His areas of expertise include IRAs, 401(k), 403(b) and 457 retirement plans.