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New Tax Credit Proposal to Encourage Retirement Saving


Many financial experts agree that Americans aren’t doing enough to prepare for retirement, and more should be done to encourage them. One such professional is Robert Klein, financial advisor and founder of Retirement Income Center in Newport Beach, California. According to a recent article in Financial Advisor magazine, Klein has proposed a new tax credit for individuals who purchase deferred income annuities. While it would be required that the deferred income annuity be purchased with non-qualified money in order to be eligible for the suggested tax credit, it would allow for income distributions to receive favorable tax treatment.

Klein believes that we are in a perfect political climate for such a program to be authorized by Congress and approved by the president. With a lack of long-term care  planning, a questionable future for Social Security and the diminishing presence of private pension plans, tax reform is already a hot topic, making it a great time to discuss new proposals. Klein’s proposal is of a tax credit longevity annuity plan (TCLAP), which is similar to a qualifying longevity annuity contract (QLAC).

“Many people think 401(k) plans are pensions, but they are not. They are simply savings plans and will not provide lifetime payments,” Klein said. His plan includes a tax credit to encourage participation, therefore it requires approval by Congress and the president, which he has already begun to seek.

“QLACs represent a good effort by Congress to encourage retirement savings, but the kicker is that money coming out is taxable and there is a $125,000 limit on the money that can be used to purchase the annuity,” he added.

Under his proposal, after-tax money would be used to make the annuity purchase, but a tax credit would be given equivalent to 8% of the initial and subsequent purchases if the purchaser is not part of a 401(k) or other qualified retirement plan. For those who are, the credit would drop to 4%.

“I would propose a purchase limit of $100,000 in the initial contribution year and $50,000 in subsequent years with a lifetime limit of $750,000. This would result in a maximum investment tax credit of $8,000 or $4,000 in the initial year and $4,000 or $2,000 in subsequent years, depending on the purchaser’s participation in a qualified retirement plan,” Klein stated.

Another important feature would be the capability to withdraw funds to use for long-term care protection prior to the lifetime income start date. Specifically, up to $5,000 a month could be used for long-term care with a lifetime of 125% of the cumulative purchase amount.

“I am trying to solve several problems at the same time with this proposal: the absence of private pension plans for Americans, the lack of long-term care insurance, and the question of Social Security’s sustainability,” Klein said.

Written by Rachel Summit

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