Over the past few days, the media went a little bonkers about a proposal out of Washington that may or may not have reduced or eliminated the tax deduction for retirement plans such as a 401k. Wall Street Journal columnist Jason Zweig (who I generally really like and admire) went so far as to say “if you have pitchfork in your garage, keep it handy. Your 401k might need defending.”
It’s important to say upfront that I think everyone should take advantage of every tax benefit they are legally allowed to take advantage of. If you can contribute $18,000 per year for one spouse and an additional $18,000 for the second and receive a $36,000 tax deduction for doing so, by all means go for it. That being said, I don’t think it’s inappropriate to also say that such a system should likely not exist.
Sure, I am glad there is some incentive to save for retirement. It’s a strong motivator to save for the future and Uncle Sam would much rather we save for ourselves than for us to increasingly look to him to bail us out in our old age. But does the tax deduction really need to be quite as generous? No, it doesn’t. It disproportionately benefits the wealthy while offering only confusion to most workers concerned about saving for their future.
It would also be great to simplify the retirement planning landscape. There are different contribution limits to 401k’s, IRAs, SEP IRAs, SIMPLE IRAs, and more. There are different rules and options for pre-tax contributions and post-tax contributions. There are rules on income limitations and employer funding requirements. This complexity benefits no one, except the financial planning and accounting profession that are paid to make sense of it. On behalf of the financial planning profession, there is plenty of work to do and help we can offer even if Congress were to reduce some of the complex rules. I would rather see this complexity go by the wayside so I could focus more on the more important issues facing my clients.
Do you want to make it easier for Americans to save for retirement? Make it simpler to do so. In the meantime, if you get a tax deduction for saving for your golden years, it is probably a good idea to take advantage of it.