Will tax cuts cost 401(k)s?

Taxes
Tax cuts could affect 401(k)s.

Republican leaders in Congress have yet to unveil their plan for cutting taxes. But one possible aspect is drawing plenty of attention—the possibility of shrinking the amount workers can contribute to 401(k) plans.

The New York Times reports:

Details of the Republican tax plan have not yet been released, but the talk has been of imposing a cap of $2,400 a year on tax-deferred contributions to 401(k) plans — a sharp reduction from the current ceiling of $18,000 a year for people under 50, and $24,000 for people age 50 and above.

There would still be a tax benefit, but it would probably be under a Roth-style structure.

President Donald Trump at first tweeted, “There will be NO change to your 401(k).” But since then, he has backed away from that assurance.

At issue, The Times reports, is the need to offset the cost of massive cuts in corporate taxes:

Their tax bill includes giant reductions in business taxes. Figuring out how to pay for tax cuts is always a grueling task, but it is especially complicated in today’s bitterly partisan atmosphere. Republican lawmakers intend to push through a bill without any Democratic support — but there is a catch. The single-party strategy in this case triggers a rule that requires the policy to have no impact on the budget at the end of 10 years. To make the math work, lawmakers need to come up with the revenue to pay for the cuts sooner rather than later.

Which is where the change to 401(k) comes in, since it would allow the government to increase revenue now, vs. in the future:

“It’s just an enormous budget gimmick,” said William Gale of the nonpartisan Tax Policy Center. “It’s raiding future revenues to pay for current tax cuts. This is not a retirement security story.”

The accounting sleight-of-hand irks Mr. Gale, a former economic adviser to President George H.W. Bush, because, he says, it is financially irresponsible. “It’s just government borrowing by another name,” he said. “You’re not really raising revenue,” just changing when it’s collected.

One thing that’s important to keep in mind in all this debate is that it is still uncertain what will come of it. Whatever happens with the legislation, Sterling Accounting will be ready to help you navigate your tax issues.

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