Brookings Institution Proposes Double Tax on 401(k) Contributions

The following is a statement from Brian H. Graff, Executive Director/CEO of The American Society of Pension Professionals & Actuaries (ASPPA) in response to The Brookings Institution’s report “15 Ways to Rethink the Federal Budget, Proposal 6: Better Ways to Promote Saving through the Tax System.”

“Brookings Hamilton Project has proposed placing a 28% cap on the ‘rate at which deductions and exclusions related to retirement saving reduce a taxpayer’s income tax liability.’ Because the tax incentive for retirement savings is a deferral, not a permanent exclusion, the proposal would more accurately be described as double taxation of contributions to retirement savings plans for anyone with a marginal tax rate of over 28%.

You won’t expand coverage by penalizing small business owners for offering a 401(k) plan. Retirees already pay ordinary income tax on distributions from retirement savings plans. If this proposal went through, a small business owner in the 39.6% bracket would pay an 11.6% tax on contributions made to the 401(k) plan today, and pay tax again at the full rate when they retire.

The Hamilton Project paper acknowledges that individuals subject to this double taxation may decide to put their savings somewhere other than in the 401(k) plan. What it fails to acknowledge is when that double-taxed person is a small business owner and it no longer makes sense for the owner to have a 401(k) plan, that owner probably won’t offer a 401(k) plan to the employees, either.

ASPPA strongly supports expanding coverage through proposals such as automatic enrollment IRAs. But we think those proposals should be a step up for workers who have no access to workplace retirement savings. Not a step down for workers that had a 401(k) plan before their employer got hit with a double tax on their own 401(k) contributions. ”

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