The president addressed what he calls unfairness in the tax system, stating most middle-class retirees spend down their assets during retirement, which means they owe income taxes on whatever capital gains they have accrued. The proposal contends that the wealthy can often afford to hold onto assets until death, allowing them to use a loophole to avoid ever having to pay tax on capital gains. The president’s proposal would treat bequests and gifts (other than to charitable organizations) as realization events, like other cases where assets change hands. Additionally, it would increase the total top capital gains and dividend rate to 28%, the same rate as under President Reagan.
To make retirement tax benefits work for middle-class families, President Obama has advised reforming retirement tax incentives and expanding savings opportunities. The president acknowledged that Americans face an array of retirement savings choices, ranging from auto-enrollment to doing everything on their own, including opening an account, managing contributions, and researching and selecting investments.
The president outlined four key aspects of the retirement tax reform plan:
- Auto-enrollment for Americans without access to a workplace retirement plan in an individual retirement account (IRA) – Employers that do not currently offer a retirement plan and have more than 10 employees would be required to automatically enroll their workers into an IRA. Workers could opt out of saving if they choose.
- Tax cuts for auto-IRA adoption, as well as businesses that offer employer plans or switch to auto-enrollment – The proposal would provide a $3,000 tax credit to employers with 100 or fewer employees that offer an auto-IRA, minimizing the burden on small businesses. Additionally, the proposal includes tripling the existing “start up” credit in order to provide a $4,500 tax credit to small employers that begin offering a retirement plan, offsetting the administrative expenses. The tax cuts would also include a $1,500 tax credit for small employers already offering a plan that add auto-enrollment.
- Ensuring long-term, part-time workers can contribute to their employer’s retirement plan – The president proposes that employers who offer plans be required to allow employees who have worked for the employer for at least 500 hours per year for three years or more to make voluntary contributions to the plan. This plan aims to combat the fact that only 37% of part-time workers have access to a workplace retirement plan, the proposal said, partly because employers offering plans are currently allowed to exclude employees who work less than 1,000 hours per year, no matter how long they’ve worked for the employer.
- Imposing a maximum on retirement account savings – President Obama advises prohibiting contributions and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances are about $3.4 million, which the proposal said is enough to provide an annual income of $210,000 in retirement.
The proposal compliments other actions taken by the president, including the creating of the “myRA” starter savings vehicle.
A fact sheet outlining the president’s tax proposals is here.