The fight over tax reform is starting to get personal.
So far, much of the debate in Washington has centered on overhauling the corporate tax code. But a new coalition of consumer and industry groups is spotlighting the potential for major changes to the individual side — particularly the way that Americans save for retirement.
The White House and Republican leadership on Capitol Hill have said they want to streamline the tax system, allowing Americans to file their returns using nothing more than a large postcard. To achieve that, they are considering eliminating most of the individual deductions in the tax code. The principles for reform the administration outlined in April save only two: for mortgage interest and charitable donations.
Later, the White House clarified that it would also preserve the deduction for 401(k) contributions. But the Save our Savings Coalition — whose members include AARP, Fidelity and TIAA — is worried that promise could come with some big caveats. Deductions for retirement contributions are worth $583.6 billion through 2020 — a piggy bank that could be hard for lawmakers to resist as they scrounge for ways to pay for tax cuts.
"You get the sugar high if you tax retirement plans right now for tax reform," said Diann Howland, vice president of legislative affairs at the American Benefits Council, a member of the coalition. "But it's going to have a drain on the federal Treasury in the out years because you won't be getting that revenue back in."
Under the current system, individuals can defer taxes on the money they save for retirement until it is actually withdrawn. That benefit encourages households to save, Howland said, since their tax rate is usually lower during the golden years than while they are working and saving.