Trump Promises Tax Overhaul Will Not Include Cuts To 401(k) Plans

Image courtesy of Steven Depolo

The Republican tax outline currently calls for large scale cuts to some taxes but has not yet provided much in the way of detail about how some of the government would offset some of those revenue losses. Recent reports said that the GOP was looking at lowering the maximum amount you can contribute to your 401(k) retirement savings — a proposal that chafed more than a few Americans. Now, President Trump is claiming that the tax plan will not touch your 401(k).

The President announced this morning on Twitter that the 401(k) will not be changed, saying, “This has always been a great and popular middle class tax break that works, and it stays!”

However, as we’ve seen several times this year — most notably, but not exclusively, with healthcare policy — what the President says Congress is doing and what Congress is actually doing may be two entirely different things.

Tax Package

Congressional leaders have been working on assembling some kind of tax cut package — no surprise, since reducing taxation is one of the central tenets of the modern Republican platform.

But the federal government uses tax money, so when you cut tax rates you need to come up with ways to offset that. Basically, you can do one of two things: cut spending, or increase revenue that comes from some other source.

The White House has indeed long-since proposed steep budget cuts that would offset some of the decreased revenue available from lower taxation. But that may not be enough.

Late last week, reports surfaced that one of the strategies under consideration to offset tax cuts was a severe cut to 401(k) limit contributions — from a maximum of $18,000 per year to a maximum of $2,400 per year.

As we explained, the idea behind cutting contribution caps is that 401(k) contributions are tax deferred: They come out of your paycheck before taxes are calculated. But if you can’t put money in a 401(k) and instead have to do something else with it, that’s taxable income.

So the goal would be to decrease tax rates but increase the amount of money available to be taxed: Basically, the principle at play is that 5% of $100 is the same as 10% of $50, and either way the Feds get $5.

The suggestion of lowering 401(k) limits was met with immediate pushback, however. For one thing, Americans are always being encouraged to increase our collective savings rates and put more away for retirement; lowering the amount you can contribute to a standard retirement plan clearly works against that.

But also, there’s a massive amount of money in, well, the money business. Should the 401(k) contribution cut shift from rumor to actual proposal, lobbyists and trade groups representing all of the massive mutual fund and investment companies that handle Americans’ savings will almost certainly object and push hard against it.

Washington-watchers expect an actual draft of proposed tax legislation to surface sometime in November.