President Donald Trump tweeted Monday there will be no change to a popular retirement savings plan under the new GOP tax bill.
“There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!” Trump said in a tweet.
Right now, taxpayers can set aside a certain amount in 401(k) retirement savings plans without paying taxes up front. Recent discussion has raised lowering that tax-deferred amount in order to boost tax revenue.
Meanwhile, the Internal Revenue Service has announced higher contribution limits for 2018.
Next year, workers can contribute up to $18,500 in their 401(k), up from $18,000 for 2017. For those age 50 or older, a so-called catchup contribution of $6,000 is permitted for a total of $24,500.
Lawmakers discussed reducing that tax-deductible amount to as low as $2,400, according to published reports. That’s below the $5,500 allowed for Individual Retirement Accounts (with a $1,000 catchup contribution for those age 50 and older).
While the allure of a tax deduction is one of the appeals of contributing to a 401(k) plan, participants are taxed at ordinary income rates when they take withdrawals from their account once they reach age 59½.
Contributions to a Roth IRA or a Roth 401(k), on the other hand, are not tax-deductible. Yet on the other end, in retirement, the withdrawals are tax-free.
More than 94 million American workers are covered by defined contribution plans like 401(k)s, according to a recent Vanguard study. Total assets in such plans stand above $7 trillion.
However, not everyone who has access to a 401(k) actually signs up for one. Add in the third or so of workers without access to a workplace retirement plan, and the rate of participation in 401(k)s overall is about 44 percent of all workers, according to the Bureau of Labor Statistics.
Other data suggests that people are not saving enough as it is, even with increasing contribution limits. In the Vanguard study, the average 401(k) balance for people already at retirement age — 65 or older — is about $197,000.
“Americans need whatever help they can get to prepare better for retirement.”
The study also shows that during 2016, just 10 percent of participants reached the maximum 401(k) contribution limits. And those who did were typically earning higher incomes.
While the majority of people do not max out their contributions, some financial advisors worry that removing a big part of the tax incentive could reduce retirement savings even further.
“Americans need whatever help they can get to prepare better for retirement,” said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, South Carolina.
Indeed, the General Accounting Office last week sent a report to Congress that warns of an impending retirement crisis if legislators fail to change their approach to the U.S. retirement system. Workplace retirement plans are considered a pillar of that, alongside Social Security and personal savings.
Discussion over reducing the 401(k) contribution limits is part of congressional tax-reform efforts. With promises of tax cuts across the board for both corporations and individuals, Republican lawmakers are searching for ways to ensure revenue can support any changes they propose.
While President Trump and other administration officials have said the deductions for charitable giving and mortgage interest will remain intact, others — such as the one for state and local taxes — could be eliminated. Republicans also want to reduce the number of tax brackets from the current seven to three, 35 percent, 25 percent and 12 percent with a possible fourth higher bracket.