Tax preferences for retirement savings remain a potential target as Congress last week removed the immediate threat of the fiscal cliff and now must address required spending cuts and long-term solutions to the growing national debt.
The deal on expiring tax cuts and other items approved on Jan. 1 by Congress in the American Taxpayer Relief Act of 2012 missed reaching a grand bargain on taxes and spending but mainly limited tax increases to high-income earners. Among the revenue-raising tax changes in the new law is one that allows for conversions to Roth plans from traditional 401(k), 403(b) and 457 defined contribution plans.
The 401(k) conversion provision was done as part of the delay, until March 1, of the spending cuts required under the sequestration portion of the law that led to the fiscal cliff.
As Congress heads toward the new deadline for cutting spending or raising additional tax revenue, there will be more threats to the retirement investment community in the coming months, said Derek B. Dorn, partner in the Washington-based law firm of Davis & Harman LLP and former senior Senate tax aide.
“Congress has delayed the fiscal cliff by erecting a new and potentially more dangerous one,” Mr. Dorn said. “The fact that retirement incentives rank second on the list of tax expenditures (behind only employer-provided health insurance) creates considerable vulnerability for retirement incentives in any tax reform process.”
Geoff Manville, principal, government relations, at Mercer LLC, Washington, said how long the financial market stays positive about what Congress has done so far will depend on where discussions go regarding further spending cuts and the debt ceiling negotiation.
He said the fiscal cliff deal “proves that anything with retirement income that raises money has legs” for future negotiations.