Published by Taylor Financial Group
Talk of possible changes to 401(k) plans have created a lot of chatter lately. Republicans are apparently discussing a proposal to decrease the amount of income you can save in your 401(k), while President Trump tweets that there will be no changes at all. In fact, Trump has repeatedly acknowledged what a “great and popular” middle class tax break 401(k)’s have offered Americans, and he has promised it is not going anywhere. We happen to agree that 401(k)’s have offered a great way for the middle class to save for retirement, so we are concerned.
The Republicans’ Point of View
Regardless of Trump’s promises, Republican tax writers are still considering changes to 401(k) retirement programs. Why? Because the new tax package involves many tax cuts, including deep cuts in business and individual tax rates. Republicans are concerned that the lost revenue from these tax cuts will be more than the budget can handle – so, they are looking for ways to offset those losses, and their best idea seems to be eliminating, or drastically changing, some of the more popular tax breaks, like the 401(k). But, according to Kevin Brady (R-Texas), House Ways and Means Committee Chairman, they are looking for ways to “tweak” the current system, but reassured that they, too, want more Americans to save more and to save earlier in their lives. This is vague, to say the least, and really doesn’t provide any comfort for Americans.
Trump’s Take
Republicans have allegedly been holding discussions with Trump about altering retirement savings program to get Americans “focused on saving more and saving sooner.” But Trump is apparently not having it! Last week, he tweeted that there would be “NO change to your 401(k).” He then reasserted himself later in the week by telling reporters how important he believes it is to leave the retirement savings plans “intact.” According to Trump, he has ended discussions with Republicans about the matter. But who knows how much control Trump will really have in the end.
What Do We Think?
We think eliminating the 401(k) retirement savings programs, or even restricting them, would be a horrible decision and one that would be detrimental to retirement savings for Americans. We have always, and continue, to encourage our clients to maximize their 401(k) contributions because saving early and often in tax deferred retirement plans is the best way to plan for a retirement that may last thirty years. In fact, saving $5,000 per year (for a total of $200,000) from ages 25-65, earning 6% per year, will grow to $820,238 at retirement. And, remember, there are many ways to save for retirement: 401(k) and 403(b) – up to $18,000 per year ($24,000 if age 50 or over), and IRA’s – $5,500 per year ($6,500 if age 50 or over), as well as HSAs and a variety of retirement plans for the self-employed.
We will continue to keep you posted on the progress of changes to the tax plan and how they might affect your 401(k) plans. In the meantime, we urge you to participate and take advantage of 401(k) programs offered by your employer, especially if they offer a match – which is basically free money! If you’re confused, concerned or have questions, give us a call today.
Sources:
NY Times, Trump Promises ‘No Change to Your 401(k)’ as Congress Considers a Contribution Gap, Oct. 23, 2017
ABC News, Republican Tax Plan Could Affect 401(k)s, Despite Trump Assurances, Oct. 25, 2017
Distributions from traditional employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
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