Are Democrats Eyeing 401(k)s, IRAs for Tax Hit?

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Investors Business Daily:

Is your 401(k) safe from the tax man? That's a question that might be worth asking, as the congressional "supercommittee" scrambles to find $1.5 trillion in additional deficit cuts.

In September, the Senate Finance Committee held a little-noticed hearing that explored changes to retirement plans — principally employer-sponsored 401(k)s — that would in one way or another cut their tax deductions.

The tax breaks' size makes them a tempting target for lawmakers. According to the White House budget office, tax exemptions for 401(k)s and IRAs will "cost" the government more than $436 billion over the next five years.

Senate Finance Committee Chairman Max Baucus, D-Mont., complained that "in spite of the tremendous tax preferences," Americans aren't saving nearly enough for retirement.

Critics say the existing system benefits mostly the rich. The liberal-leaning Tax Policy Center calculates that 80% of these tax "expenditures" go to the top 20% of earners. Such people "would almost certainly save for retirement even without tax incentives," said Karen Friedman, policy director at the Pension Rights Center.

But Judy Miller of the American Society of Pension Professionals and Actuaries argues that the deduction's cost is wildly exaggerated. Adjust for the taxes paid when retirees withdraw money and the cost is cut in half.

And, she says, the break is more progressive than some allege. Among other things, high earners who get a bigger tax break going in end up paying more in taxes when they take the money out.

"Contrary to the common myth, the tax incentives are not upside down at all," she said at the Senate hearing.