There are many new tax proposals being advanced by the new administration; some may be appropriate while others may be dangerous to our economic stability both corporately and individually, in my opinion. One that particularly concerns me, as it relates to individuals trying to create a financially secure plan for retirement, involves changing the tax treatment of traditional IRA and 401(k) plan contributions.
Under the current rules, contributions to these plans are deductible from one’s taxable income, assuming certain income limitations are met in the case of IRA contributions. So, if one makes $70,000 a year and contributes $5,000 of those earnings to the employer’s 401(k) plan, their taxable income is reduced by the $5,000 contribution. Using the new administration’s logic, that is unfair because someone earning $40,000 who contributed $5,000 would receive a lower benefit because they are taxed at a lower rate. It is proposed that a direct credit against taxes due be substituted for the deduction — you might say, so what, it works out the same. That would be true until you consider the next part of the proposal. To compensate for the perceived advantage that higher tax bracket taxpayers have over lower tax bracket taxpayers, it is proposed that the credit one would receive from making such contributions be limited to a certain percentage which favors the lower bracket taxpayer over the higher bracket taxpayer.
By example, the lower bracket taxpayer might get a 10% credit for contributions made while the higher tax bracket taxpayer might get a 20% credit for such contributions. Under the proposal, the cap on tax credits might be 15% thus limiting the higher tax bracket taxpayer to that amount and causing a portion of their contribution to, in effect, be taxable. The rub comes when the funds are withdrawn, presumably in retirement. While only a portion of the contributions were tax favored at the time they were made, there is no indication that withdrawals will be taxed differently than they are at present, i.e., all withdrawals will be fully taxed when received. The net result is double taxation on a portion of the contributions — limiting the tax deduction/credit of contributions made but taxing all withdrawals. I fear that this will cause many middle-income people to reevaluate the extent of their participation in retirement savings plans with all the future consequences that may result from such a decision. It could also create a wave of future retirees more dependent on government support when Social Security and other government resources are already strained.
I am not taking a political position here, just expressing a concern for the future economic health of the country and its citizens. I realize that the new administration wants to increase Federal spending in a number of ways and has to create a lot more tax revenue to pay for it. However, this proposal is not, in my view, a sensible way to accomplish their goals as it will come back to haunt us years from now when this administration is long gone.
By the way, this form of taxing IRA’s will not affect those who can no longer contribute to IRA’s due to retirement or are no longer a wage earner. This will not affect retirees, but will most certainly affect those who are working and earning a good wage.
Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President and founder of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Ric Schilling is a Certified Financial Fiduciary (CFF). You may contact Ric at 904-371-3302 or 888-891-3381 Please visit: www.seniorguardian.com
Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), an SEC Registered Investment Advisor. Frederic H. Schilling of Schilling and Associates, LLC (d/b/a Senior Guardians of America) is an Investment Advisor Representative of CSA.
