The Internal Revenue Code provides incentives to encourage individuals and businesses to save for retirement. Tax incentives that power retirement savings — like 401(k) plans — are a deferral, not a permanent exclusion, like deductions for mortgage interest, or charitable contributions. This means that for retirement savings, income deferred today will be taxable income in retirement.
In addition, the current tax incentives are a critical component in a small business owner’s decision to set up and maintain an employer-sponsored retirement plan. For a small business owner, the ability to use tax savings on his or her contributions to generate all or part of the cash flow needed to pay contributions for other employees is an important factor in the decision to establish and maintain a retirement plan. The current system of tax incentives for retirement savings motivates small employers to not just offer a retirement savings vehicle to all the employees in the workplace, but also to make contributions on the employees’ behalf.
Today, there are a number of proposals, from government and think tanks, which would reduce retirement savings tax incentives to raise short-term revenue. Proposals to raise money by reducing such incentives are short-sighted, producing only short-term deficit reduction and causing serious long-term damage to the retirement security of tens of millions of working Americans. In addition, reducing these incentives for employers literally would reduce the cash the small business owner has to work with in order to put a retirement plan in place and provide a meaningful retirement benefit for rank and file employees.
Reduced incentives will mean the creation of fewer new retirement plans, the termination of retirement plans currently in operation, or lower employer contributions for the remaining retirement plans.