Tax Reform and the 401(k): Changes ahead?

With Capitol Hill and political pundits’ radio shows abuzz with talk of tax reform and what exactly said reform entails, there has been much speculation over whether the proposal might include the introduction of a $2,400 cap on the amount one can contribute to a retirement account on a pre-tax basis. President Trump was quick to quell the rumors early Monday tweeting, “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!”

On Wednesday however, President Trump’s position seemed a bit less staunch.  A reporter asked the President whether changes to tax-free 401(k) contributions are, definitively, off the table, noting that the Chairman of the House Ways and Means Committee, Kevin Brady, had suggested earlier in the day that the option was still being considered.  The President responded that it may still be on the table, if only as a negotiating tool.

Defined benefit plans, like your grandfather’s pension plan of yesteryear, have become virtually obsolete.

Millions of Americans rely on their company-sponsored 401(k) plans to help them put away money for retirement. The fact that deductions are made at the payroll level means that employees don’t have to physically set aside the money themselves, (thereby avoiding the temptation to spend their retirement savings on a new TV or boat).  And the fact that those 401(k) contributions are tax-deferred means that their hard-earned dollars have the opportunity to grow under the most favorable conditions.

The non-partisan Employee Benefit Research Institute collected millions of data points from the administrative records of 401(k) recordkeepers, and found that “more than half of current 401(k) contributors would be affected by a $2,400 pre-tax contribution limit” (source: http://www.napa-net.org). To put that into perspective, if the pre-tax cap were imposed, an employee earning $60,000 and contributing 5% to her 401(k) would receive a tax deduction on the first $2,400 of her deferrals; the other $600 would be taxable as income.

You can bet plenty of businesses and organizations oppose this option. American Retirement Association CEO, Brian Graff, has this to say, “The 401(k) is not a piggybank for corporate tax cuts,” and pledged that “the ARA will work to make sure this doesn’t happen.”

As usual, we’ll continue to watch this space. In the meantime, don’t hesitate to reach out with any questions: 513.834.9383