Obama Budget Limits Some Retirement Savings Tax Breaks

February 14, 2012 (PLANSPONSOR.com) – Initiatives in President Obama’s budget proposal would impact retirement savings for some workers.

It would limit the tax rate at which high-income taxpayers can reduce their tax liability to a maximum of 28%, affecting only married taxpayers filing a joint return with income over $250,000 and single taxpayers with income over $200,000, according to news reports. This limit would apply to all itemized deductions, foreign excluded income, tax-exempt interest, employer-sponsored health insurance and retirement contributions.  

Also in the budget is a provision that would eliminate required minimum distributions for people who are at least 70½ years old whose tax-deferred retirement plan balances do not exceed $75,000.  

In addition, the proposal provides a few more details on a recommendation to target military retirement benefits as a source of savings by establishing a commission to review them. According to the administration’s proposal, the Department of Defense would transmit, to a presidentially appointed commission, initial recommendations on how to change the military retirement system (see "DoD Panel Proposes Retirement Benefit Change for Troops"). The commission would hold hearings, make final recommendations and draft legislation to implement its recommendation.   

The President would again weigh in on the commission recommendations and send them to lawmakers. The proposal would also include “grandfathering provisions” for current retirees and active-duty members.