President Barack Obama's budget proposal to remove the tax incentive for families earning more than $250,000 to contribute to 401(k) plans “is a bad proposal based on bad math,” said Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries.
One part of a package of tax increases proposed by Mr. Obama in his fiscal year 2013 budget unveiled Monday calls for limiting those retirement savings deductions, which the White House estimates would add $410 billion to federal revenues.
“The tax break for retirement savings is a deferral, not a permanent write-off,” Mr. Graff said in a statement.
In addition to losing a current tax break, higher income earners “would actually be penalized for saving — paying taxes now and taxes later,” Mr. Graff said, and also discourage small-business owners from setting up or keeping retirement savings plans for employees, he said, because the tax advantage of their 401(k) matching contributions would shrink as well.
Current law has a $250,000 cap on compensation used to calculate contributions to 401(k) plans. The president's budget would limit the value of all deductions, including those for retirement contributions, to 28% of the contributed amount from 36%, for people in top brackets.
“Penalizing small-business owners that make over $250,000 who contribute to 401(k) plans won't balance the budget, but it should and will make them think twice about putting in a plan to begin with,” Mr. Graff said.