401(k) Reductions Come Up Again in Tax Reform Talks
Last month, I blogged how Congress floated around making changes to 401(k) retirement plans in order to make up for lost “revenue” due to tax cuts. That change was taxing the earnings before a person places money into the fund.
Another idea has come up and it’s even worse. Now they are thinking about changing the pre-tax limit to $2,400 instead of $18,000. That’s an 87% change and could force people to put even less into their retirement.
It also adds fuel to Sen. Rand Paul’s (R-KY) opposition to the Senate budget bill that passed, which allows a clearer path to tax reform, but didn’t cut spending enough. Common sense tells us that he is correct.
The Proposal & Opposition
First off, let’s look at the proposal. The Wall Street Journal reported:
Lobbyists and others in the retirement and financial-services industries who have spoken to congressional staff and committee members say lawmakers are looking at proposals that would allow 401(k) participants to contribute significantly less before taxes than what is currently allowed in a traditional tax-deferred 401(k). An often mentioned amount is $2,400 a year. It isn’t clear whether that would apply only to 401(k)s or IRAs or both.
Currently, employees under age 50 can save up to $18,000 a year in a 401(k) before taxes, while those 50 or older can set aside up to $24,000. In an IRA, the annual contribution limits are capped at $5,500 and $6,500 for the same age groupings. The 401(k) limits are scheduled to rise to $18,500 and $24,500 in 2018.
If this happens, then people will have to change their savings amount or take home paycheck. WSJ explained:
For example, someone in the 25% income-tax bracket who puts $1,000 into a traditional 401(k) today would save $250 in taxes, reducing take-home pay by a net amount of $750. But if forced to put $1,000 in a Roth account, take-home pay would decline by the full $1,000, because there was no tax deduction. The advantage is that there would be no taxes due when the money is removed later from the retirement account.
Fidelity Investments Senior Vice President David Gray said this proposal has caused “significant concern” within the company because “it would essentially require trade-offs between the certainty of the immediate deduction and the prospect of tax-free retirement income.” He told the U.S. Chamber of Commerce that the changes would take one to two years to implement, too.
Investment Company Institute said that “Americans have saved $7.5 trillion in 401(k)-type accounts, plus $8.4 trillion in individual retirement accounts.”
So the tax reform the administration wants, I guess, leads to lower “revenue.” But as I have stated over and over, unlike a sane person, the government refuses to stop spending. When confronted with a budget crunch, a sane person looks at his budget and crosses things off a list. You know, STOPS SPENDING.
Not the government. This is proof that Paul is correct: The Senate budget bill does not cut enough spending. WBKO reported Paul’s comments on why he voted no (emphasis mine):
“The American people are sick and tired of Congress spending recklessly with no end in sight. We can’t spend our way to prosperity. Today, the Senate considered a budget that simply didn’t measure up and spent too much. I will fight for the biggest, boldest tax cut we can pass, but I could not in good conscience vote for a budget that ignores spending caps that have been the law of the land for years and simply pretend it didn’t matter. We can be for lower taxes AND spending restraint.”
“This amendment will allow instructions so we could really do what we say we are going to do, which is cut spending. I think in light of the fact that we are for tax cuts, we ought to also be for reducing spending so we don’t explode the debt,” Dr. Paul said when introducing the amendment.
“What I’m asking us to do is to be responsible, budget for this, stay within the caps that we have self-imposed on us, and actually act like we really believe in what we say, that the debt is a problem.”
“My amendment will provide budget reconciliation instructions so that Republican senators can fulfill their promise. So that they can actually repeal Obamacare root and branch, as they promised.”
“My amendment provides budget reconciliation instructions to increase the tax cut to $2.5 trillion. If we are to believe this budget, it claims to save over $6 trillion over ten years – more than enough to go bigger, better, and bolder on cutting taxes.”
Paul said on the floor before the vote that Republicans should be for tax cuts and “for reducing spending so we don’t explode the debt.”
Only THREE REPUBLICANS voted with Paul on his amendment to cut spending and allow for easier tax reform: Jeff Flake (AZ), Mike Lee (UT), and my senator James Lankford (OK). Why did Republicans hate it? Because it included a cut to defense spending.
THREE REPUBLICANS joined Paul on his amendment that “cut discretionary spending by $43 million.” They were Flake, Lee, and Steve Daines (MT).
Remember this? STOP. SPENDING.DONATE
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