401k Plans Targeted In GOP Tax Reform: 5 Things To Know

WASHINGTON, DC — While aging Americans fear an imminent retirement crisis, Republican lawmakers are prepared to slash tax benefits for 401(k) accounts, the key savings vehicle for millions across the country, as Republicans scramble to find money to fund massive tax cuts for business and the very wealthy. Rolling back these benefits would deal a blow to workers using 401(k)s to squirrel away their retirement savings tax-free.

The plans are especially popular among middle class workers President Trump promised to protect when campaigning for the White House.

The 401(k) plans allow employees to save a portion of their income, up to $18,000 (or $24,000 for people over 50) in pre-tax contributions. People only pay taxes on the money they've saved in the accounts when they withdraw it after retirement. Reports suggest the congressional Republicans are considering dropping the cap from $18,000 to $2,400 — axing much of the benefit savers now receive.

Here are 5 things you should know:

1. Trump has distanced himself from the idea.

Trump began the week by promising on Twitter that 401(k) policy wouldn't change — but Press Secretary Sarah Sanders later seemed to back off that promise, refusing to confirm that the plans are safe in a Thursday interview on Fox News. Much of the GOP tax reform plan remains up in the air, so it's impossible to say just which provisions will be included in the final version.

2. The money has to come from somewhere.

Republicans don't just want tax "reform" — they want tax cuts. But the money to pay for the promised tax cuts has to come somewhere, and "somewhere" could likely be Americans' retirement savings.

Obviously, politicians would rather not cut programs people like, but if they want to cut taxes without blowing up the deficit, the money has to come from somewhere.

Also See: Ryan And Pelosi Divided As House Budget Passes

3. The impact on savers could be huge.

If President Trump does end up signing a bill that obliterates much of the 401(k) benefits, savers can put any money over the $2,400 cap into a Roth IRA. But they will have to immediately pay taxes on money going into a Roth IRA. Because they have to pay taxes on these savings, many experts suspect they'll save less.

"Americans owned $7.9 trillion in IRAs at year-end 2016, with Roth IRAs constituting only $660 billion of that total," said Seth D. Harris, the former Acting Secretary and Deputy Secretary of Labor in the Obama Administration on CNBC. "That's fewer than one in 12 IRA dollars invested in the tax-first-ask-questions-later option Congress is now talking about applying to 401(k)s. Retirement savers do not want their contributions eroded by taxes."

On the other hand, some people argue that the Roth IRAs actually are more beneficial than 401(ks).

4. The White House is promising that workers will get a raise, but cutting 401(k) benefits might undermine this claim.

The Trump administration has said that the tax plan — even before being completely worked out — could give workers an average $4,000 raise. This claim is — to say the least — highly contentious.

But even assuming it were true, the plan to cap 401(k) contributions could undermine any wage increase for many people. As Ben Steverman and Suzanne Woolley explain at Bloomberg, "Someone making $100,000 and saving half the maximum amount in a traditional 401(k) is lowering his or her tax bill by almost $3,000 a year."

Much or all of the White House's promised wage increase from the tax plan could be wiped out if savers lost this tax benefit under the potential changes to 401(k)s.

5. Saving money by cutting 401(k)s may just be a gimmick.

But apart from the debatable effects on retirement savings, it's not clear slashing 401(k) benefits would do what the GOP wants: offset their massive tax cuts.

If savings are moved from 401(k)s to Roth IRAs, that will bring in more revenue to pay for tax cuts now. But as Joseph Lawler points out in the Washington Examiner, this might just serve to borrow tax revenues from the future.

When the funds are eventually withdrawn from Roth IRAs in the future, they won't be taxed as 401(k)s would be. For this reason, Lawler calls the idea a "gimmick" — it only saves the government money now because it costs it money in the future.

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