Budget Proposals for Retirement Savings—A Deterrent or Not?

April 12, 2013 ( – Since the release of the proposed fiscal year 2014 budget by President Barack Obama, there have been differing opinions on how retirement-related provisions will potentially affect retirement savings.

By Kevin McGuinness | April 12, 2013
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The proposed budget would place a cap on retirement savings, prohibiting employees from saving more than $3 million in individual retirement accounts (IRAs) and other retirement accounts. Analyses from the Employee Benefit Research Institute suggest that up to 5% of retirement plan participants could be affected by this cap (see “Savings Caps Could Affect 5% of Participants”).

The budget would also place a cap on how much could be deferred on a pre-tax basis, taxing participants' savings before they are put into retirement plans, but not eliminating the taxation of assets when they are withdrawn from retirement plans.

Small Business Owners Will Be Limited 

“We were very concerned when last year’s budget included a double tax on contributions to 401(k) plans. Small business owners earning over $250,000 would have to pay tax on contributions in the year the contributions are made then pay tax at the full rate when contributions are distributed at retirement,” said Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries (ASPPA). "We were hoping this misguided proposal would be eliminated in this year’s budget, but instead the Administration has kept the double tax proposal, and added another penalty for retirement savings."

“Now, if a small business owner has saved $3 million in his or her 401(k) account, they won’t be allowed to save any more. Without any further incentive to keep the plan, many small business owners will now either shut down the plan or reduce contributions for workers. This means that small business employees will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on the employee’s behalf to pass nondiscrimination rules,” said Graff.