Stakeholders say they’ve heard that Republicans are considering significantly lowering the amount of money people can tuck into their traditional 401(k) plans on a pre-tax basis.
Currently, people can contribute up to $18,000 annually to their traditional 401(k) plans. Those contributions are paid before taxes, meaning people don’t pay taxes on the money until they pull it out of their account.
The potential change that people following the tax bill are hearing about would lower the maximum annual contribution to $2,400. Amounts over $2,400 could be put into Roth 401(k)s, where the money is taxed upfront but not when it’s withdrawn.
Lowering the cap on pre-tax contributions would raise revenue in the short-term, which would help lawmakers pay for lowering tax rates. Under the budget resolution that Senate Republicans approved Thursday, a tax-reform bill can’t add more than $1.5 trillion to the deficit over 10 years.
But critics of a reduction in the 401(k) limit say that so-called “Rothification” is a budget gimmick that would raise revenue in the near term but lower federal revenue in the long run.
A Wall Street Journal article Friday on the potential cap prompted a quick response from Senate Minority Leader Charles Schumer (D-N.Y.).
“Republicans are so determined to cut taxes on the wealthy that they’re willing to tax the retirement accounts of millions of middle class Americans,” Schumer said in a statement. “The GOP’s total devotion to millionaires and billionaires comes at the expense of every family using a 401(k) to save for a decent retirement.”
House Majority Leader Kevin McCarthy (R-Calif.) in early September pushed back on the idea that Republicans want to tax 401(k)s.
“Why would you punish people when they’re actually saving for their own retirement and they’re not looking to government?” he said in an interview on the Fox Business Network. “You want to incentivize that even further. Don’t punish people who actually save their own money.”
(Excerpted from The Hill 10/20/17)