The current tax treatment for 401(k) plans costs the U.S. Treasury $50 billion to $70 billion in revenue each year, according to an analysis from the Center for Retirement Research at Boston College.
In its analysis, the center calculated the present value of lost revenue, net of the present value of future tax payments.
The researchers note that the exact amount of the reduced federal revenue “has become a hotly debated topic” as Washington policymakers address budget deficits and search for additional revenue, including reduced tax benefits. CRR looked at the deferred value rather than simply the cash basis of the tax treatment.
Instead of Congress' traditional approach to calculating tax revenue over a 10-year time period, Alicia H. Munnell, director of the center, said in an interview that the analysis was done to help policymakers and industry groups figure out what would be gained or lost under budget proposals from President Barack Obama and Congress, which seek to reduce the tax benefit of 401(k) contributions.
“There are numbers floating around that were just wrong,” she said, because they ignore the proposed tax increase on capital gains. “There are offsetting aspects of the tax reform proposals because they're only looking at half of it.”
If capital gains and dividends are taxed at ordinary tax rates, as various deficit reduction panels have suggested, “being inside a 401(k) becomes infinitely more valuable,” said Ms. Munnell.
Still, said Edward Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America, “The only number that counts is the number used by the tax writers.”
