Retirement Saving Tax Credits and Deductions

“Saving is the No. 1 priority,” says Robert Kaplan, the American Retirement Association’s Director of Technical Education. Kaplan made his comments during a recent ASPPA webcast that highlighted tax credits and deductions relevant to retirement saving, as well as proposals intended to increase it.  

Either/Or

One of the retirement financing options Kaplan highlighted was the choice between pre-tax deductions and Roth accounts. With the former, Kaplan noted, a current deduction is made and taxes paid upon deferral and earnings upon distribution; with the latter, there is no current deduction but there are no taxes to be paid on earnings on qualified distributions. Such distributions, he said include those made at least five years after contributions start or a conversion occurs, and for a distributable event such as attaining age 59½, death or disability.  

One size does not fit all in the choice between pre-tax deductions and a Roth, Kaplan said, because no one knows what tax rates will be in the future.

Factors to consider include:

• whether to pay taxes while one has income or to have more take home pay now; and
• which tax bracket one is in now as opposed to when one is retired.

If one is eligible for the Saver’s Credit, says Kaplan, Roth deferrals may make sense since one would get the tax preference now (but not a deduction) and upon distribution. “There is no one right answer for everybody,” he remarked. The most important thing, he said, is to save—and confusion over the tax benefit and how to invest an account should not stop a saver. 

Another choice Kaplan highlighted is that between after-tax benefits and a Roth account. With after-tax benefits, there is no current deduction but one pays taxes on earnings upon distribution. In addition, Code Section 402(g) does not impose any limitations, but Section 415 does. With a Roth, on the other hand, there is no current deduction and one does not pay taxes on earnings on qualified distributions. Section 402(g) does impose a limitation and an ADP test must be performed unless it is a safe harbor plan. After-tax benefits are not very common, Kaplan said, and highly compensated individuals are best able to use them. 

Congressional Interest

Kaplan discussed some provisions of the Securing a Strong Retirement Act (SSRA, a.k.a. SECURE 2.0). 

One is Section 114 of that bill, which would allow employers to provide a small and immediate financial incentive to employees to join and contribute to a retirement plan, including 401(k) and 403(b) plans. Kaplan also cited provisions that would expand the Roth by allowing SEPs and SIMPLE IRAs to be designated as Roth IRAs, requiring that catch-up contributions—but not those to SEPs or SIMPLEs—would be designated as Roth, and plans would be allowed to permit employees to treat matching contributions as Roth. 

Another potential change Kaplan discussed is allowing adjustments for distributions for the last three years (up to due date of filing of tax return, including extensions) for: 

• IRAs (Traditional, Roth or MyRA);
• ABLE accounts; and  
• qualified retirement plans—401(a), 401(k), 403(b), 457(b), SEP and SIMPLE plans, as well as the Federal Thrift Savings Plan.

Kaplan stressed that the SSRA has not been enacted, and that the provisions now under discussion are something we may see but that are not yet set in stone. Still, he said, they are an indication that “on Capitol Hill they’re really concerned about saving for retirement.” 

The talk in Congress 10 to 12 years ago was about cutting retirement benefits, Kaplan continued, but “now, they’re talking about ways to get people to save for retirement.” He added, “Why do people on Capitol Hill like the Roth? I’m saving for retirement, but I’m also paying my taxes right now. It’s the best of both worlds for them.” 

The Bottom Line

Saving is “the No. 1 priority,” said Kaplan; after that, the details can be worked out. “Make that commitment and then we’ll talk about what makes sense,” he remarked.

Available on Demand

The webcast, “Tax Credits and Deductions—How to Save While Saving for Retirement,” is available on demand here.