This article was last updated on October 24
401K and 403b limits have held steady or moderately increased over the last few years with more and more Americans using these tax advantaged employer sponsored vehicles to save for their retirement income.
However this bastion of American retirement savings is under attack from Trump and GOP tax reform proposals. Basically to fund proposed tax cuts the Republican tax plan is looking at limiting the amount of pretax money households can contribute to 401K (or 403b for government employee) retirement saving accounts. By limiting these pre-tax contributions, the government can collect additional tax on these earnings. Thereby providing additional revenue to offset the losses from tax cuts.
GOP insiders have said they would offset the 401k contribution limit cuts by allowing increased limits for Roth 401K or Roth IRA accounts where contributions are after tax, but growth and withdrawals are tax free. So what the GOP proposal is essentially doing is shifting e tax revenue from the future to the near term. Longer term the deficit will only grow.
Based on various sources the 401k contribution cuts could be massive – from the current $18,000 ($18,500 in 2018) per year to $2,400 a year. This would hit middle income earners the most for whom an employee sponsored 401k vehicle is their main form of retirement saving.
The has become a big issue for large (and powerful) fund management companies on Wall street and their lobbyists. 401k and IRA Fund management companies like Vanguard and Fidelity have become so large and dominant due in large part to the growth of retirement savings accounts where they manage the lion’s share of employer plans. So it is unlikely they will want a change in the rules. And given their influence I would not be surprised if this proposal is quashed in Trump’s tax reform package.