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Reconciliation bill holds major changes for retirement saving

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Gordon Gray, American Action Forum Director of Fiscal Policy, joins Yahoo Finance Live to discuss retirement savings provisions, taxes, and outlook on the $3.5 trillion reconciliation bill in regards to retirement.

Video Transcript

- Welcome back. As part of our retirement series brought to you by Fidelity Investments, we're breaking down the key retirement provisions in the Democrats' $3 and 1/2 trillion reconciliation bill. Here to help us do that is Gordon Gray, director of fiscal policy at American Action Forum.

Gordon, welcome back to the show. When you look at some of what's in this reconciliation bill, the thing that sort of struck me was this requirement for many businesses, even very small businesses, to offer a retirement plan for their workers. Tell us how that would work if it does get passed. And would this be a burden to some of these small business owners?

GORDON GRAY: Sure. So in the reconciliation bill, there is a provision that would require employers with as few as six employees to auto enroll those employees, create workplace retirement plans for them. There would be a tax credit for small businesses to help offset those administrative costs, but you're right. That's a pretty heavy handed mandate.

You know, the motivation is-- is sound and well-taken, which is that we know that there are millions of workers with access to retirement programs at the workplace, but not everybody actually utilizes them. And so there's a worthwhile goal to encourage more people with access to participate in these plans, but I am concerned about the burden on-- on employers, particularly coming out of the pandemic.

- Exactly. Exactly. Now, a second major change in this bill would make changes to the savers credit-- it's an existing tax provision that lets certain lower-income individuals get a tax break when they put money away from-- for retirement, so a little bit of an incentive, if you will. What do you think about that? And what's the chance that it actually stays in that reconciliation bill and passes?

GORDON GRAY: Sure. So the structure of the current retirement of the savers credit is it's a credit against your taxes. And it's means tested. So it's only available for Americans with incomes under a certain level. And the change that the Ways and Means Committee is proposing is to make that effectively refundable so essentially a direct payment, only in this case, it would go right into their retirement account.

Now, the way that the auto-enrollment provisions work is that it requires workers to put in a minimum of 6% of their income towards their retirement. That's-- for lower-income Americans, that could be a considerable burden. That would really take a hit on their disposable income. So there's a rationale that if you're going to mandate workers who otherwise aren't contributing to their retirement, if you're going to mandate that-- that contribution, then it follows to provide particularly low-income Americans with a little bit of assistance there.

But it's also costly. That's about $20 billion or more in costs right there. But-- but that's fundamentally how that works. Now, I think that piece will probably make it to the end to the extent that the reconciliation bill makes it into law.

- All right, I want to tick through some other changes here because they're looking for ways to also bring in additional revenue. And one of those ways would be to tap the wealthy. They're looking at adding a contribution limit for the retirement plans of high-income earners with an account balance of over $10 million. And they're also looking at limiting the options for a so-called backdoor Roth IRA. Just quickly tell us what that is.

GORDON GRAY: So essentially, this-- you had some, you know, savvy tax planners essentially be able to exploit what was a one-year feature in 2010 essentially. There was a-- the provision that sort of limits Roth conversions was-- was off the books. And so you had some-- some ability for people to avoid tax through converting their retirement incomes and-- or their retirement plans.

And-- and what you have-- and you have a few very visible cases of this in the news. But if you look at the-- the tax consequences of this just looking at limiting a lot of the retirement provisions available for very high-income Americans, you see that the tax consequences here, they raised about $4 billion over an entire decade with these changes.

So you can understand given the headlines some very visible examples of wealthy Americans taking advantage of this. But it's, frankly, just not such a big problem that it raises a lot of tax revenue when you go looking to change it. So I think this is a little bit of policy chasing headlines. All the same, it does raise a little bit of money. And certainly in this reconciliation bill, they need all the money they can get.

- You bet. If you could point to one thing in that reconciliation bill regarding retirement that will make it all the way through, we just talked about the saver's credit, for instance, what would that one thing be, Gordon?

GORDON GRAY: So I would expect that the limitations on tax-preferred accounts for some of these high-income Americans, particularly given some of the more visible examples of this, I expect those will stay in in part because it does raise money.

As the reconciliation bill is winding its way through Congress, like I said, they're going to need all of the offsets they can get because there's already some objections to the prescription drug benefit savings, to some of the tax increases. So they're going to want to hold on to it as many of the offsets as they can. And given the visibility on some of these, they're-- they probably feel pretty strongly about being able to-- to defend these changes.

- All right, Gordon Gray of American Action Forum, thanks for making sense of that reconciliation bill for us and for joining us for this Funding Our Future segment. A reminder that Funding Our Future is an alliance of organizations dedicated to making a secure retirement possible for all Americans.