As we've pointed out numerous times over the years, Americans are not the best savers with some 97 million people living paycheck to paycheck and nearly 50% of families saying they have less than $1,000 stashed away for the proverbial 'rainy day'. Given that, it might surprise you to learn that rumors are swirling this morning that Republicans are considering reducing the incentives American families have to save by slashing contribution limits on 401(k) plans. Per the New York Tmes:
It is unclear if Republicans will ultimately include a cap on contributions in the tax bill that they are expected to release in the coming weeks. Such a move would almost certainly prompt a vocal backlash from middle-class workers who save heavily in such retirement accounts and from the asset management industry.
The proposals under discussion would potentially cap the annual amount workers can set aside to as low as $2,400 for 401(k) accounts, several lobbyists and consultants said on Friday. Workers may currently put up to $18,000 a year in 401(k) accounts without paying taxes upfront on that money; that figure rises to $24,000 for workers over 50. When workers retire and begin to draw income from those accounts, they pay taxes on the benefits.
Rumors have circulated for months that negotiators were debating including a cap as a way to help offset the revenue loss from a reduction in business tax rates that Republicans have put at the center of their plan. Reducing contribution limits would be, in effect, an accounting maneuver that would create space for tax cuts by collecting tax revenue now instead of in the future.
The congressional Joint Committee on Taxation estimates that tax exclusions for individual retirement contributions will cost the federal government $115 billion for the 2018 fiscal year. That is just a fraction of the $1.5 trillion tax cut that Republicans are aiming to enact.
As the Times notes, a cap on tax-deferred contributions would likely push Americans into Roth IRA where earnings are taxed immediately but not on withdrawal...that is until a new wave of Americans start withdrawing that money tax-free in 40 years and the rules have to be re-written all over again.
Such a move would be likely to push Americans to shift their savings to so-called Roth accounts, where contributions are taxed immediately, and not when they are drawn out as benefits. That would increase federal tax receipts for the short run.
Not surprisingly, Democrats have used the rumors to orchestrate a media campaign alleging a Republican attack on middle class working families.
Democrats have seen firsthand the perils of proposing changes to savings accounts. In 2015, an outcry forced President Barack Obama to quickly back off his proposal to change the tax benefit of college savings plans known as 529 accounts.
On the Senate floor on Thursday, Senator Gary Peters, Democrat of Michigan, warned that the Republican majority was “keeping open the possibility of raising taxes on Americans who are trying to save for their retirement.”
In a statement on Friday, Representative Richard E. Neal of Massachusetts, the top Democrat on the Ways and Means Committee, said that the Republican proposals “would hurt those saving responsibly for retirement at a time when an alarming number of families have fallen behind in their retirement savings.”
Meanwhile, Trump has vehemently denied the 401(k) rumors this morning over Twitter.
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
So, what say you? Fake news or are 401(k) plans about to get slashed in favor of corporate tax cuts?