As lawmakers try to fix the fiscal cliff, Americans' financial futures hang in the balance. Wayne Braun from People's United Bank appeared on the Channel 3 Morning News to talk about what this could mean to your personal finances.
Q. With the fiscal cliff, Congress has been looking for solutions, can you explain why they are looking at 401(k) plans?
A. Congress is looking at reducing or eliminating various tax deductions and incentives to raise more tax revenue. However, tax incentives for retirement plans are different than other deductions. For example you can deduct mortgage interest from your income and you never pay taxes on that amount. Retirement money is tax deferred, meaning you don't pay taxes now but it will be subject to income tax when withdrawn at retirement. This fact is not being considered in the analysis by Congress.
Q. What would be the impact to the average retirement plan?
A. They are looking to reduce the amount of money that you and I can contribute to these plans from our own paycheck. In addition, they are looking to limit the amount that employers can contribute and deduct on behalf of employees. Both of these options will limit the retirement savings of the over 60 million Americans that contribute to 401(k) plans, 75% of which earn less than $100,000 per year. Limiting employer deductions for these plans could discourage employers from contributing to or maintaining 401(k) plans.
Q. Don't employees have other options for retirement savings such as IRAs?
A. Yes, however, according to data from the Employee Benefit Research Institute (EBRI) over 70% of workers earning between $30,000 and $50,000 participated in their employer's 401(k) plan compared to only 5% who save for retirement without a plan at work, such as an IRA. Due to the increased use of these plans, retirement savings now represent over 65% of American families' financial assets. The bottom line is that 401(k) plans are an effective and proven method to help America save for retiremenT.
Q. How can people learn more?
A. They can go to www.savemy401k.com to learn more.