Congress Weighs Massive Changes to 401(k) Contributions

The 401(k) is an employer’s best friend, isn’t it?

This extremely popular workplace benefit allows employees to save up to $18,000 a year in a tax-deferred retirement plan. (Workers over 50 can save up to $24,000 a year.) They don’t have to worry about paying tax on that income until they begin to dip into their 401(k) at retirement age.

Most job seekers wouldn’t even think of applying for a full-time job that doesn’t offer a 401(k)—it’s a no-brainer. It’s estimated that 54 million Americans have an active 401(k).

But, as congress works on its new tax cut plan, the future of the 401(k) is on shaky ground.

As The New York Times reported, “Lobbyists, tax consultants and others said last week that congressional negotiators were discussing proposals to potentially cap pretax contributions at $2,400 annually for 401(k) retirement accounts.”

If these measures were to move forward, it would mean workers can no longer contribute $18,000 per year without paying taxes—they can only save a measly $2,400.

“Contributions above $2,400 would be directed into so-called Roth accounts that are taxed immediately,” said The New York Times, “a shift known as ‘Rothification’ of retirement savings.”

How exactly does this help congress cut taxes? Essentially, it gives the government a boost of retirement savings tax income now instead of later.

According to The Motley Fool:

“For the federal government… 401(k) plan contributions eat up a huge chunk of potential tax revenue. In 2016, 401(k) plans took away more than $90 billion in tax revenue, according to figures from the Joint Committee on Taxation, and that number could rise above $145 billion by 2020 under present law.

With some Republican lawmakers threatening to jump ship on tax reform, those who support the plan are looking for ways to offset the immediate reductions in tax revenue that would come from lower tax rates on individual and corporate taxes, the increase in the standard deduction, and other promised breaks.”

Unfortunately, lowering the amount of pre-tax contribution would essentially de-incentivize workers from saving for retirement—not a good long-term strategy.

President Trump disagreed with the proposed changes in a tweet on Monday morning, in which he said: “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!”

Interestingly, news about the congressional proposal came only a few days after the IRS announced that they would be increasing 401(k) contribution limits by $500 in 2018, thereby allowing employees to contribute up to $18,500 per year, pre-tax.

It remains to be seen whether the drastic decrease in contribution limits proposed by congress will go into effect. It’s unlikely that such an unpopular change would be included in the final version of the tax cut bill, but anything’s possible.

Keep an eye on the news, and be prepared to let your representatives know how you feel about changes to 401(k) contribution limits.