Retirement Tax Rules At Issue In Fiscal Talks

Jan 2, 2013

Legislators appear to have stepped away for the minute from significant changes to tax advantaged retirement accounts in the latest attempt at a fiscal cliff fix. That’s welcome news for those who say right now most Americans don’t do enough to save for retirement. WNPR’s Harriet Jones reports.

Surveys consistently show that working for or owning a small business is a woefully bad way to plan for your golden years.

“There’s a vast majority of small business owners in this country that do not have a retirement plan and therefore their employees don’t have a retirement plan.”

That’s Tom Foster of The Hartford. According to some estimates between 60 and 70 percent of small business owners neither save for their own retirement nor offer a plan to their employees.

“Left to their own device, five percent of employees, only five percent actually save for retirement, so that means the vast majority of employees who aren’t covered under an employer sponsored plan aren’t really doing anything specifically for retirement.”

And the savings deficit among small businesses has only gotten worse during the recession. He says even small business owners who provide plans have pulled in their horns during the downturn.

“Because a lot of business owners saw their accounts eroded because of the market, I think they’re a little more cautious in how they invest. I think there are some that might have been a little more aggressive have come back to a more conservative approach.”

For others, the recession brought much more drastic changes.

“The first thing I did was downsize dramatically, so I laid off 20 people and closed two showrooms and sold two pieces of real estate, in an effort to try to do whatever I could to get the cash flow under control. And it just continued to fall and fall and fall.”

In 2008, Lorey Cavanaugh found her previously thriving West Hartford business in a sudden tailspin. She owns and runs a remodeling company, Kitchen and Bath Design and Construction – in one of the industries hit hardest by the recession. Eventually she says,

“The two options for me were to file bankruptcy, or to tap into my personal retirement accounts.”

Cavanaugh had been an exception to the small business retirement planning rule – she was one of the minority who saved diligently for her old age and had built up a sizeable nest egg. In the midst of the crisis, she felt very strongly that her business still had a viable future if she could just hang on through the recession, and she wanted to honor her debts.

“I’ve been in this community doing this work for almost thirty years. I’ve got longstanding relationships with contractors and vendors, and filing bankruptcy didn’t seem to be the ethical right choice for me.”

And so, she broke open her nest egg.

“Hundreds of thousands of dollars. The entire thing is gone. It’s very scary because I’m not thirty years old. I was hoping to be retired within the next two, maximum five years. And I’m not sure I will ever retire, frankly.”

The good news – her all or nothing bet paid off and her business has come back to life in a big way. She’s solvent and on a sound financial footing once again.

“The phone’s ringing like crazy now, we have lots of clients, nice projects. The bad news is that realistically ten years is probably the most I’m ever going to be able to do.”

To add insult to injury, because the accounts she raided were tax advantaged, she faced an immediate $18,000 federal tax bill for using the money to save her business.

“I’m not looking for someone to pay my way. I borrowed my money. It seems like I should be able to do that under those circumstances. I didn’t borrow my money to buy a new car or to buy frivolous things – it was to keep a company alive – a vibrant, viable business.”

It illustrates the complex choices many business owners face around retirement planning issues. Senator Richard Blumenthal says it also points to some vital public policy choices for lawmakers.

“If someone is going to honor debts and go beyond what is perhaps legally required, and use retirement savings, certainly the government ought to think twice about penalizing that person.”

The whole matter of the tax privileges surrounding retirement accounts has been on the table in the fiscal cliff talks and the larger deficit reduction discussion. Most famously, the Simpson Bowles plan would have capped pre-tax contributions to 401k plans at 20 percent of income. Blumenthal says while a lot of the focus has been on reducing spending or eliminating tax benefits, retirement savings need to be viewed differently.

“I think as part of the reform of our tax code we can accentuate this positive result. We need to regard those mechanisms, or credits, deductions as investments, not just tax expenditures.”

An investment he says, because every small business owner or employee who saves for their own retirement represents another person that may not fall into the government safety net in their old age.

For WNPR, I'm Harriet Jones.