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updated on Oct. 26, 2017
The "buzz" that a GOP tax reform bill would limit pretax contributions to employer-sponsored 401(k) accounts grew louder last week, with more talk about "Rothification" or requiring that 401(k) contributions above a certain threshold—such as $2,400—be made to a Roth account funded with after-tax dollars.
A tweet by President Donald Trump on Monday, however, said that limiting the 401(k) tax exclusion won't happen—or did it? Trump's calling the tax exclusion "a great and popular middle class tax break" just might leave room for Congress to limit the 401(k) tax exclusion for high earners.
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!— Donald J. Trump (@realDonaldTrump)
October 23, 2017
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!
Below is a roundup of articles that discuss what the future could hold for 401(k) plans.
Trump Vows to Leave 401(k) Plans Untouched Through Tax Reform
President Donald Trump on Oct. 23 distanced himself from reports suggesting Republican lawmakers are considering changes to the tax code that, among other things, would retool some U.S. employees' retirement plans. "There will be NO change to your 401(k)," Trump tweeted. Reports surfaced last week that House lawmakers were considering lowering the 401(k) threshold for pretax contributions to just $2,400. In theory, that would expose more of Americans' earnings to the IRS while helping to offset lost government revenues from Trump's proposal for a significantly lower corporate tax rate and retooled personal income brackets.(U.S. News & World Report)
Rep. Brady and Trump Go Back and Forth
House Ways and Means Chairman Kevin Brady, R-Texas, said following Trump's tweet that the tax reform bill may still include changes to 401(k)s. "We think, in tax reform, we can create incentives for Americans to save more and save sooner, which can help. So we are exploring a number of ideas in those areas." Asked about Brady's comments that the issue could still be on the table, Trump said: "Well, maybe it is, and maybe we'll use it as negotiating. But trust me. That's one of the great things. You know, there are certain elements of deals you don't want to negotiate with." He added, "401(k)s, to me, are very important, and they're important because that's one of the great benefits to the middle class. I didn't want that to go too far. That's why I ended it very quickly." (Politico)
Shift to Roth 401(k)s 'Highly Likely' Part of Tax Reform
Mark Iwry, a senior fellow at the Brookings Institution and a former senior Treasury Department official who served under President Barack Obama, believes the Republican majority in Congress will mandate at least a certain portion of 401(k) contributions be diverted toward Roth accounts. "Yes, we will get tax cuts sooner or later, and the Rothification will be a likely part of it," Iwry said last week. "My guess is: full Rothification, no, off the table, too extreme and too politically sub-optimal. Partial Rothification, yes, seems highly likely," he added. "Full" Rothification would entail a mandated 100 percent use of Roth accounts for 401(k) savings, while "partial" would dictate only a certain portion of savings be Roth.(Investment News)
[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]
Financial Industry Worried GOP Tax Plan Will Change 401(k)s
Currently, people under the age of 50 can contribute up to $18,000 annually to their traditional 401(k) plans (rising to $18,500 next year). 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.
Jill Hoffman, vice president of government affairs at the Financial Services Roundtable, said that this option is "something that's a cause of great concern" both for those managing retirement plans and for plan participants. (The Hill)
Tax Reform Might Not Spare Employee Benefits
The Treasury Department estimates that the tax advantages that traditional defined contribution plans receive will lower tax revenues in 2018 by $69.4 billion. "Some tax reformers have advocated limiting or even eliminating pretax retirement plan contributions in favor of Roth contributions," said Kathleen Coulombe, senior advisor for government relations at the Society for Human Resource Management (SHRM). "As tax reform discussions continue to evolve, the SHRM-led Coalition to Protect Retirement will be engaged heavily in advocacy efforts on the tax treatment of employer-provided retirement benefits in the tax reform debate."(SHRM Online)
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