401(k) retirement plan is again in the path of tax-reform scythe
Saving for retirement is supposed to be a methodical, carefully planned process. Often it isn't, but if we're not saving, that's usually our problem. Now, however, there are noises of uncertainty coming from the federal government, noises that are not encouraging for at least one form of saving.
One of the most popular retirement-savings programs is the 401(k), or salary-reduction plan. In this plan, employees can stash away as much as $30,000 a year or 25 percent of their incomes. They don't have to pay taxes on the deposits or on the interest earned until withdrawal. Thus they not only shield income but can often reduce income enough to slip into a lower tax bracket. Employers usually match some of the workers' contribution.
In the last three years, this has been enough incentive to get more than half of the 500 largest corporations to install a 401(k) for their employees. By next year, more than 7 million workers will have 401(k) plans, the Treasury estimates.
But the process that is supposed to lead to tax simplification or tax reform is putting a crimp in people's ability to plan based on knowing which retirement-saving vehicles will be available and which ones may get blown away by changes in the political climate.
When the first tax-reform proposal was sent aloft by the Treasury Department last year, it proposed eliminating the 401(k). Apart from the revenue that would be saved by elimination, the Treasury contended that the biggest 401(k) deposits were mainly from upper-level executives, who were using it as a tax dodge and who may or may not be using it to save for retirement.
Then, President Reagan submitted his version of the tax overhaul to Congress in May. This time, he proposed to keep the 401(k) but limit the annual contribution to $8,000, or $6,000 if $2,000 was put into an individual retirement account (IRA).
Now, in the latest switch, the Treasury is once again proposing eliminating the plans, to quiet concern in Congress that the overall package may lead to higher deficits.
According to some of the experts who follow these things, even more controversial parts of the tax package, like removing the deduction for state and local taxes, may not survive. If this happens, these observers believe, Treasury officials who are under orders from the President to keep tax reform ``revenue neutral'' will offer other tax-raising measures -- like eliminating 401(k)s.
``This just shows the whole process is revenue-driven,'' says Kevin O'Brien, a Washington lawyer whose firm represents the Employers Council on Flexible Benefits. ``There is no retirement income policy.''
Eliminating these plans would raise $11.5 billion over the next five years, according to Treasury estimates. Mr. O'Brien believes the government has several more revenue-raising ideas in its hip pocket that can be pulled out if it loses on a major issue like state and local taxes.
Also, he points out, the chances of a tax-reform bill passing both the House and Senate this year seem to be getting smaller.
It's possible the House Ways and Means Committee and maybe the House itself will report out a bill, he says, and will then send it on to the Senate, partly to let the Republicans take the heat for dealing with these sensitive issues.
There, Robert Dole (R) of Kansas, the Senate majority leader, has indicated the Senate won't have time for tax reform this year. And in election years -- like next year -- dealing with controversial issues is not a popular congressional pastime.
With that kind of political thinking going on behind individual Americans' attempts to put together a sensible retirement plan, what should people do?
Those who have a bent for such things can start by writing a few letters.
``People should write to their congressman,'' advises Robert McAllister, a consultant with the Wyatt Company, a benefits consulting firm.
You can also take advantage of whatever retirement-saving plans are available, to the extent you can afford to set aside money now.
A popular alternative, of course, is the IRA, expanded to include all wage earners as of 1982. Right now, the individual limit on IRA deposits is $2,000 a year, and $2,500 for a spousal IRA where one partner is not working.
In part to take some of the sting out of its 401(k) proposal, the Treasury has offered to raise the limits on spousal IRAs to $4,000.
After you've fully funded your IRA, there are other tax-saving retirement plans that can be used, and although these do not permit you to deduct the money invested from your taxable income as an IRA does, they do accumulate tax-free interest until withdrawal.
Another option is state and municipal bonds, which should continue to do well even after tax reform. This is particularly true of more traditional bonds used to pay for schools, roads, and town halls and backed by the taxing power of the government.
Although these general-obligation bonds would continue to be tax exempt, bonds for ``private purpose'' projects -- like home mortgage subsidy programs and industrial parks -- which are paid out of revenues from those projects could lose their tax-exempt status.
Finally, if your employer is offering a 401(k), take advantage of it as much as you can. If tax reform is delayed, the survival of these plans may in part depend on a growing constituency.
So your participation would not only help you, it might help keep the 401(k) available for workers in the future.
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