Mixed Messages About Retirement Tax Provisions Causing Alarm

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By Laura Davison

Inconsistent messages from House leadership, committees, and members about whether Congress will tap retirement provisions to pay for an overall tax bill are raising red flags in the retirement savings community, tax lobbyists told Bloomberg BNA.

The House Ways and Means Committee is telling stakeholders that revenue associated with retirement savings won’t be used to fund tax reform, two tax lobbyists said.

But individual members say they are working with leadership to develop ideas around a concept known as “Rothification” that would tax savings upfront, rather than when they’re withdrawn in retirement, said the lobbyists, who weren’t authorized to disclose the meetings with lawmakers and congressional staff. Ideas under consideration include taxing all savings upfront or allowing a certain amount to be contributed tax-free with anything over the limit being subject to a levy.

“We are getting mixed signals, to be honest,” Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets, which represents retirement plan sponsors, told Bloomberg BNA. “By and large, members of Congress, to their credit, very much support the 401(k) system and individual savings for retirement. But at the same time, we do continue to hear from those inside the Beltway that from a budget scoring perspective they need to raise revenue.”

Committee Chairman Kevin Brady (R-Texas) and Ways and Means members “believe that pro-growth tax reform should promote policies that encourage more Americans to save and plan for their retirement,” a statement from the committee said. “They are working to simplify policies and also provide flexibility so families can choose what works best for them.”

The discussions come as lawmakers are looking for revenue to fund their tax plan. Brady has said he wants a bill that doesn’t add to the deficit. To do that, he will need to eliminate or modify existing tax provisions to fund lower tax rates for businesses and individuals.

The retirement community is concerned that the modifications would impact individuals saving less for retirement if the tax reason to do so is eliminated. AARP is pushing for changes that preserve retirement incentives and promote savings, said Cristina Martin Firvida, AARP’s director of financial security and consumer affairs.

“Changes to retirement savings to finance tax cuts or other things that are unrelated to retirement is a big concern,” she said.

Bucket of Money

Everyone knows that retirement is a big bucket of money that can be tapped for revenue, for better or for worse, a GOP aide said. House leadership has explicitly said this tactic is being considered because of the money it would raise, not because it’s good for retirement policy, one lobbyist said.

Former Ways and Means Chairman Dave Camp’s (R-Mich.) 2014 tax plan called for contributions made above a certain limit to be taxed when they were submitted.

That provision and other pension- and retirement-related items would raise $212.3 billion over a decade, according to tabulations from the Joint Committee on Taxation.

Plan sponsors are also growing wary of the increased discussion about Rothification because it could greatly alter the types of savings accounts products that can be offered.

“There are real concerns with Rothification in the market. There is a lot of execution risk associated with it,” said Isaac Boltansky, senior vice president and policy analyst at Compass Point Research and Trading LLC. “There are some large companies that have retirement offerings and there is a belief that those offerings could be nullified or marginalized.”

Add Incentives?

Additional incentives, such as an expanded savers credit, could be a way to make some members of the industry support a bill that includes Rothification, but there would need to be a final bill before that determination could be made, said Jill Hoffman, vice president of government affairs for investment management at the Financial Services Roundtable.

“At the end of the day, we’ll need to see what the final package looks like and how it shakes out. We are warning Congress to be very careful,” she said. “We’re fearful based on what we’ve heard so far that it could cause more harm to savers.”

The industry is organizing in advance of tax reform. The Save Our Savings Coalition, which formed in April, counts Wells Fargo & Co, TIAA-CREF Investment Management LLC, and American International Group Inc. among its members. The group also includes retirement advocates, such as AARP and the American Retirement Association.

“A move to a mandated Roth system would reduce take-home pay for workers and could disincentivize Americans to save,” the group said in a July letter to Senate Finance Committee Chairman Orrin G. Hatch (R-Utah). “When given a choice, American workers overwhelmingly choose traditional accounts over Roth accounts, and this Coalition supports savers’ ability to choose the type of retirement account that works best for them.”

Budget Games

Rothification allows the government to front-load revenue in the budget window, because it can account for that money when it is contributed, rather than waiting for the saver to withdraw it in retirement. But in the long run it can lose revenue, which is why it’s sometimes referred to as a budget gimmick, Scott Greenberg, a senior analyst at the Tax Foundation, said.

The Republican Congress plans to use a strategy called budget reconciliation to pass a tax bill, which could make it difficult to include plans to Rothify retirement savings. Under reconciliation, the bill can’t add to the deficit outside the 10-year budget window. Rothification could solve the short-term problem of needing revenue to offset rate reductions, but could create a larger procedural hurdle if there isn’t revenue down the road to make up for the loss.

“Rothification made a lot of sense in a bill like Camp’s where you are trying for 10-year revenue neutrality,” Greenberg said. “It doesn’t make much sense here.”

There is no clear data about what full or partial Rothification would do for savers, AARP’s Martin Firvida said.

“These are really big changes,” she said. “If we’re going to do this, we’d like to have some hearings with some real data in front of us.”

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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