Will You Be Able to Deduct Retirement Plan Contributions?
Due to the border adjustment tax proposal getting no traction, Congress is looking at additional revenue raisers. An option getting a lot of air time right now is only allowing “Roth” type retirement plans. Currently, a business can set up a profit sharing plan with a 401k component. This allows both the employer and the employee to a current deduction. The earnings inside of the retirement plan are tax-free and only when the employee finally retires and starts taking distributions do they finally start to pay income tax.
Under the budget scoring rules, this costs the government about $500 billion over 10 years. If instead, they no longer allow the employee to deduct the 401k contributions and put restrictions on how much the employer can deduct, they can take those savings and use it to reduce corporate tax rate and flow-through tax rates.
Although the employee does not get a deduction, the distributions from this type of plan will be tax-free. Many of our farmers set up these 401k plans especially nearing retirement in conjunction with a cash balance plan. If these changes are put into law, most of this planning opportunity will disappear. We will keep you posted.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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