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If Retirement Pros Set Tax Policy Instead of Politicians, This is What We’d Get

If Retirement Pros Set Tax Policy Instead of Politicians, This is What We’d Get
October 31
00:03 2017

They say watching Congress piece together legislation is like watching someone make sausage. Once you witness the ugly details, you’ll never want to go there again (or eat sausage). Politicians live in a sea of competing special interests. This adds complexity where simplicity ought to rein. We see this any time they craft a major bill. For the retirement industry, anything dealing with tax reform means savers are at risk Congress will make things harder to do.

But what if retirement professionals got to decide the best way to encourage people to save for retirement. These are the experts who live on the front lines of the retirement industry. They see, first hand, what works and what doesn’t work. They have no political favors to pay back, but they do have to worry about getting “re-elected” (i.e., retaining their clients). As a result, they may be more accountable when it comes to acting in the best interests of retirement savers. That’s because they have a direct fiduciary liability for their advice and actions that no elected official can ever have.

Nearly every financial adviser we spoke with agreed only one policy change would get people to save more for retirement: Increasing the cap on retirement contributions. “To increase retirement savings, Congress can easily remove the cap on ROTH, Traditional IRAs, 403(b)s and 401(k) contributions,” says Jason J. Howell, President of Jason Howell Company in Vienna, Virginia. “Once the limits are removed, fewer people would have to ‘think’ about saving.”

Increasing the cap doesn’t mean you can’t also address the issue of “lost” revenue. Reza Zamani, CEO of Steel Peak Wealth Management in Los Angeles California, says, “Continue to increase the cap on the amount one can set aside; change the RMD age to 68 to get the money back out of retirement accounts to get the tax revenue they need.”

Long term, though, recovering “lost” revenue today may be less of a priority than preventing a retirement crisis in the future. “With Social Security’s long-term outlook in question, Americans need to take control of their own retirement savings,” says Dan Kellermeyer, Financial Planner at New Heights Financial Planning in Sioux Falls, South Dakota. “The more self-reliant we are on our own retirement savings, the less the government (and other taxpayers) have to spend on people who did nothing to save for retirement. Providing tax savings in one of the biggest ways Congress can encourage savers to contribute to their own personal retirement plan.”

Mind you, increasing the cap does not necessarily mean increasing the tax-deferred portion of the cap. When asked what he would tell Congress to do to encourage more retirement saving, Andy Bush, a Partner/Advisor in the Retirement Plans Division of Horizon Wealth Management in Baton Rouge, Louisiana, said, “They wouldn’t like my answer and it isn’t as simple as it sounds, but I think they should eliminate contribution limits – allow people to save what they want to save. One caveat to that is to still place a limit on tax-deductibility (pre-tax) contributions, but make it higher. Quite honestly, I believe only a small group of people would actually contribute more. Find another area to tax people or reduce government spending (I worked in the state government for a few years… there is sooo much waste). Granted, if such a change was made, some would cry ‘the rich just keep on getting richer.’ Maybe so, but I’ve known plenty of wealthy teachers (and they don’t make big salaries) because they ‘behaved’ themselves into their wealth.”

The attraction of these ideas is that they don’t require a new retirement savings vehicle. They can be achieved using the existing corporate sponsored retirement plan infrastructure. Jack Towarnicky, Executive Director of the Plan Sponsor Council of America, located in Westerville, Ohio, says, “In lieu of curtailing the $18,000 limit in pre-tax deferrals, Congress should enable voluntary, revenue raising provisions that increase savings. If Congress has an objective of increasing coverage AND revenue, that will increase participant savings, there are a number of VOLUNTARY provisions Congress can make available to plan sponsors to add to their plans: a) Allow participants in plans who have separated from their employer the option to contribute, post separation, to their plan on a Roth basis, if they are not otherwise eligible to contribute to another employer-sponsored qualified plan; b) Add a ‘cashless conversion’ capability to the code where a plan sponsor can enable in plan Roth conversions and the participant could elect a loan (not subject to 72p dollar limits) to directly pay federal and state withholding taxes – plan assets do not decline but savings increase as the ultimate payout will not be subject to taxation; and, c) Add one time 10-year forward averaging rules (curtailed by Tax Reform Act of 1986) to only apply to Roth conversions during the next ten year budget window. Again, each of these adds to savings, and, combined, add revenue during the 10-year budget period. There are many more options that can both increase savings while also increasing tax revenues during the 10-year budget window. If Congress wants a list, just ask.”

Of course, perhaps, rather than tweaking the tax code, it might be more beneficial simply to tweak the eligibility requirements of legislators. Ilene Davis of Financial Independence Services in Cocoa Florida and author of Wealthy by Choice: Choosing Your Way to a Wealthier Future, says, “Get a new Congress of people who want others to be rich.”

All joking aside, it is possible to increase the cap on taxable deductions to both encourage retirement savings as well as increase future tax revenues. “Tax deductions are a method of helping taxpayers save money,” says Kellermeyer. “If we look specifically at 401k plans, the growth that occurs in the account will be taxed when the saver starts to pull their money out. The more savers can contribute now, the more their accounts will grow, and the more they would be taxed on later in life. More importantly, the more retirees can be reliant on their own savings, the less they will rely on the government which means its expenses can be reduced.”

Davis, however, wonders if weaning people off government handouts, while in the people’s best interests, may not be in the best interests of the politicians. She says, “allowing people to invest more while they are working and able to invest means if they invest wisely, they will have more money in the future, and will need less in government benefits. Imagine if everyone in America were a millionaire and didn’t need handouts from other taxpayers. Of course, that is what members of congress are concerned about. If no one needed handouts, how could they buy votes?”

There is a chance a future Congress may change the tax rates to raise revenues from retirement plan withdrawals. This, in terms of tax revenues, ironically increases the present value of any tax-deferred savings today. This may be why many retirement advisers recommend the use of Roths rather than tax-deferred savings options. “Unfortunately,” says Howell, “increasing the cap on tax deferred accounts will also increase tax revenue in the long haul. In all likelihood, tax rates will be higher in future years to pay for the $20 trillion deficit. All of those ‘deferred’ accounts may be taxed more heavily than they would have been today.”

Real-world financial analysts must look at budgets in a more comprehensive manner than elected officials. Towarnicky says, “Depending on the budget rules, increasing tax revenue outside the 10-year budget window may or may not be a priority for this round of tax reform. Much depends on the level of tax deferred earnings and the difference, if any, between the taxpayer’s current marginal tax rate and the taxpayer’s average tax rate in retirement. Don’t forget state income taxes – which adds significantly to the complexity of the calculation, particularly for those who relocate to a different state (with/without a state income tax) while employed or after retirement.”

Developing policies that encourage people to save more for retirement isn’t rocket science. It’s really common sense. Or at least a sense that is common for those who spend their lives working in the retirement industry.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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