Shelving tax breaks for retirement plans still on the table in Washington

The leaders of the Senate tax-writing committee are trying to jump start broad tax reform in that chamber by putting every tax break embedded in the code up for review – including retirement-savings incentives. In a letter to colleagues on Thursday, Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and Sen. Orrin Hatch, R-Utah, ranking member of the panel, said they were beginning with a “blank slate” and encouraged every senator to help them clean up a “tax code…littered with preferences for special interests.” Mr. Baucus and Mr. Hatch asked each of the other 98 senators to “submit legislative language or detailed proposals” for tax breaks that make the tax code fairer and promote economic growth and other policy objectives by July 26. “In order to make sure that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a 'blank slate '— that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as 'tax expenditures,' Mr. Baucus and Mr. Hatch wrote. Putting all of the tax expenditures on the table means that tax incentives for retirement savings also are included, a prospect that worries advocates. Judy Miller, director of retirement policy at the American Society of Pension Professionals and Actuaries, said that that tax breaks for contributions to 401(k) and other retirement plans are actually tax deferrals -- making them different from other expenditures, such as the mortgage deduction. “We were disappointed that once again the deferral was lumped in with permanent write offs,” Ms. Miller said. “That puts it in the wrong light.” Ms. Miller and other advocates have been explaining to lawmakers that workers who put money into retirement plans will have to pay taxes on the funds when they're withdrawn in retirement. “I hate to see this deferral treated like they can raise revenue now without losing revenue later,” Ms. Miller said. A recent Congressional Budget Office report shows that the retirement savings tax breaks are the third-highest annual tax expenditure, costing the U.S. Treasury $137 billion in fiscal year 2013. Mr. Baucus and Mr. Hatch said that eliminating tax breaks would allow legislators to reduce individual rates across the broad. The more expenditures that are jettisoned, the lower rates could go. But they also noted they are not opposed to every tax incentive. “This blank slate is not, of course, the end product, nor the end of the discussion,” they wrote. “Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form.” Retirement savings incentives should be part of that group, according to Cathy Weatherford, president of the Insured Retirement Institute. “Retention of tax deferral for retirement savings must be preserved now more than ever before as millions of Americans have become more self-reliant for their retirement security,” she said in a statement. Ms. Miller asserted that workplace place plans would wither without the 401(k) deferral. “It's these tax incentives that encourage employers to put these plans in and keep these plans running,” Ms. Miller said.