It was reported last week that Congress was considering the option of reducing the amount of income that Americans could save in their tax-deferred retirement accounts in order to partially pay for the President’s tax reform plan. For now, that idea is unconfirmed by the Trump Administration, but remains a concern for every-day Americans, and what it means for their retirement.
The tax plan
The White House proposed a tax reform bill that would cut corporate and individual tax rates. The Trump administration says the cuts would spur economic growth and help boost people’s incomes. The emerging plan would also get rid of several tax deductions in order to help pay for the plan, leading some to worry that some of the most popular would fall away. The President indicated on Monday the 23rd of October that he has no plan to limit people from using pre-tax savings for their retirement, as they can now in their 401K and IRA plans.
One version of the new tax plan would have lowered annual contribution limits for 401Ks. This could force savers to rely more heavily on other retirement plans like Roth IRAs. The way a Roth IRA works is that money can be withdrawn in retirement free of taxes since taxes were paid up front, while withdrawals from 401K plans are taxed. Leaning more on Roth IRAs would create more tax revenue up front for the government, and is seen by some as an accounting gimmick that creates revenue earlier and helps pay for the broader tax reform bill.
What the President has said
While Trump said the traditional 401K plan will stay put under the GOP tax plan, it’s not clear if that also means no limits will be placed on future 401K contributions.
Those on the outside of the Administration have speculated that changing the tax treatment of 401Ks may have been an attractive way for Republicans to raise revenues because of the total involved. The Treasury department stated that they expect such plans will lower revenues by almost $600 billion over the next five years