Republican leader offers little clarity on 401k status in tax plan

WASHINGTON––The House Republican tax bill would raise the amounts workers can contribute to their 401(k) retirement accounts, but House Majority Leader Kevin McCarthy 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 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. “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.”

The phrase “not be taxed later on” suggests that Republicans are considering increasing after-tax contribution limits for 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 taxfree 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 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.