California's Proposition 42 would shield 401(k), pension and IRA assets from new personal-property taxes

Proposition 42, the Retirement & Personal Savings Protection Act, goes before California voters in November with a defensive purpose: to keep 401(k)s, pension holdings, IRAs and other retirement plan assets off the list of personal property a future state could tax. The citizen-backed measure responds to a controversial, long-proposed run of state taxation changes aimed at retirement and personal savings accounts in 2019, 2022 and 2024, according to a 401(k) Specialist report on the measure.

The economic case for the shield rests on a study by Brad Williams, formerly chief economist and director of budget overview and fiscal forecasting in the Legislative Analyst's Office. A 1% asset tax on 401(k) and public pension savings, he estimates, would cut retirement income by 20% to 37%, equal to losses of roughly $225,000 to $1.2 million over a retiree's lifetime, and would leave employees working an additional three to seven years to rebuild the income they would otherwise have collected.

The same pro-Prop 42 research puts annual out-of-pocket taxes at up to $10,000 on retirement holdings if new state taxes applied, and estimates that 401(k) balances could fall by as much as 37% for moderate-income workers, with lifetime 401(k) costs exceeding $1.2 million in some instances. Teachers in the CalSTRS program fare worst in the estimate, some facing more than a quarter million dollars in cumulative lifetime taxes. The income figure describes what a retiree collects; the balance figure describes what a worker accumulates, and a 37% decline in 401(k) holdings for moderate-income workers is the larger of the two problems for anyone still contributing.

Robert Gutierrez, president of the California Taxpayers Association, put the case in plain terms in a release supporting the measure: Californians already pay taxes on the money they earn, he said, and the state "shouldn't be able to tax that money again simply because it's sitting in a retirement or savings account."

For plan sponsors and advisers in the state, the word doing the work in Prop 42 is "property." The assumption beneath it is that a legislature would otherwise reach retirement accounts, and the proposals from 2019, 2022 and 2024 are what the campaign points to as proof. The coverage carries no official state fiscal estimate of the measure and no account of organized opposition, which leaves the campaign's numbers as the numbers in circulation. California votes in November.