Tax Reform Blueprint Spells Disaster for Small Biz Retirements
A not-so-complex financial calculus underpins a delicate balance for small business owners considering offering a retirement plan — and Congress could be getting ready to screw that up.
As it turns out, the House Blueprint for tax reform provides a 25% tax rate on income from pass-through entities (partnerships, S corps and small business limited liability corporations). In addition, earnings on pass-through income receive a 50% exclusion under the plan.
But under the Blueprint, retirement distributions are subjected to ordinary income tax rates — and for many successful small business owners, even under tax reform, that could be a 33% tax rate; income that is contributed to a qualified retirement plan for business owners rather than passed through to business owners at 25% tax rates.
As a result, owners of pass-through entities, which are mostly small businesses, will have no incentive to defer current income in the form of retirement plan contributions. In fact, if the Blueprint is enacted in its current form, these small business owners will take a big financial hit if they defer their current income into a retirement plan.
What do you think small business owners will do presented with this choice?
Well, it stands to reason that without some kind of parity between the eventual taxation on retirement plan distributions and non-retirement investments, small business owners who might have been considering adopting a new plan will rethink that approach.
Moreover, millions of small business owners who do offer a workplace plan will find themselves incentivized to terminate their retirement plan. That will, of course, impact the availability of these plans to the millions of Americans who work for these small businesses.
And we all know that without access to a workplace retirement plan, millions of middle-income small business employees won’t save.
Still think tax reform can’t happen? Think it won’t impact retirement plans? Think again. Find out what you need to know — and what you need to do — before it’s too late.