(Bloomberg) – House Republicans’ tax-overhaul bill will raise the amounts that American workers can contribute to their 401(k) retirement accounts, House Majority Leader Kevin McCarthy said Sunday -- but he offered no answer to an important question for many savers: Will the bill reduce the annual contributions that savers can make from their pretax income while increasing their after-tax limits?
Current law sets the combined limit at $18,000, or $24,000 for workers over 50; those limits will increase slightly in 2018.
The answer carries important implications for the popularity -- and the viability -- of the tax bill that House leaders plan to release Wednesday. President Donald Trump pointed out the political risk of fiddling with the retirement plans in a Twitter message: “There will be NO change to your 401(k),” Trump said on Oct. 23. “This has always been a great and popular middle class tax break that works, and it stays!”
But House Republicans -- scrambling for ways to raise revenue that would offset the deep tax-rate cuts they’ve proposed for businesses and individuals -- haven’t embraced the red line Trump tried to set. And lobbyists who want to preserve the current system have heard that tax writers may set a cap as low as $2,400 on pretax contributions, while increasing the after-tax limits. The effect would be to increase workers’ upfront taxes on retirement savings.
Giant asset managers, including Vanguard Group and Fidelity Investments, fear that imposing such low limits on the tax-deferred savings plans would reduce the American public’s savings rate. As of June 30, 401(k) plans held an estimated $5.1 trillion.
McCarthy did little to clear up the matter Sunday.
“We’re going to raise the amount you can put in” a 401(k), he said on Fox News’s “Sunday Morning Futures” program. He also said: “And if you can do it and not be taxed later on, there is a way to make Americans more self-insured, have greater resources.”
Roth Plans
The phrase “not be taxed later on” suggests that Republicans are considering increasing after-tax contribution limits for so-called Roth 401(k) plans. Workers who use the Roth option pay taxes on their income before making the contributions to their accounts. Then they receive tax-free distributions in retirement.
“So the way we’ll look at the 401(k), we will protect it, we’ll expand the amount that you can invest, but we’ll also give you an option to actually not be taxed later in life, not to have that tax burden hovering over you in the future but actually have greater income in the future,” McCarthy said.
House leaders have yet to confirm any change for the pretax contributions. A spokeswoman for the House Ways and Means Committee referred to remarks that Chairman Kevin Brady made last week.
But when asked on Thursday to specify pretax or after-tax changes, Brady didn’t answer directly, saying only that “we’re still exploring the other ideas.” The Senate, which will be writing its own version of tax legislation hasn’t made a final decision on retirement plans, Republican Senator Rob Portman of Ohio said last week -- though he said he anticipates the Senate’s bill will largely leave current tax breaks in place.
$1.5 Trillion
House tax writers have a powerful incentive to reduce workers’ pretax contributions while allowing them more tax-free retirement benefits later. Doing so would effectively pull forward tax revenue from the future, helping to lessen the overall cost of the tax bill.
The budget that the House and Senate have adopted allows for a tax cut of $1.5 trillion over 10 years, yet the framework that Trump and congressional leaders released last month would expand the deficit by $2.4 trillion, according to one independent estimate.
On Sunday, Portman and Republican Senator Susan Collins of Maine both said they expect tax changes enacted by Congress will spur enough economic growth to boost revenue collections and reduce the deficit. “This is going to change behavior,” Portman said on NBC’s “Meet the Press.” “The question is, by how much.” Collins called that thinking “entirely realistic” on CBS’s “Face the Nation.”
Still, the gap between the budget’s guidance and the tax bill’s estimated cost may only be increasing.
On Saturday, Brady bowed to concerns from Republicans in high-tax states and said he’ll preserve an individual income-tax break for property taxes that had been targeted for elimination. That move, aimed at resolving an impasse between House leaders and roughly two dozen Republican lawmakers from states including New York and New Jersey, would create a new revenue hole of an estimated $430 billion over 10 years.
