Fight expected over possible 401(k) changes

One proposal would limit workers’ pretax contributions.

As President Donald Trump and legislators remain at odds over changing the 401(k) program to help finance tax cuts, local finance managers say one proposal could have a big impact on people who save for retirement.

Rep. Kevin Brady, the chairman of the House’s tax-writing panel, said late Wednesday that changes could be coming to the program used by 55 million U.S. workers who hold some $5 trillion in their 401(k) accounts, a system that has become a touchstone of retirement security for the middle class.

Earlier this week, Trump promised the program would be left alone, and appeared to bolster that pledge Thursday, saying he moved swiftly to end speculation that the tax-deferred program may be changed because it’s vital for working Americans.

The nearly $6 trillion GOP tax plan calls for steep tax cuts for corporations and promised reductions for middle-income taxpayers, a doubling of the standard deduction used by most Americans, shrinking the number of tax brackets from seven to three or four, and the repeal of inheritance taxes on multimillion-dollar estates. The child tax credit would be increased and the tax system would be simplified.

Crucial details of the plan have yet to be worked out.

However, one proposal lawmakers are looking is whether to limit the amount people can contribute pretax to their 401(k) accounts — a change critics say would discourage people from saving for retirement.

The New York Times reported the plan could limit pretax contributions to $2,400 annually, down from the current maximum of $18,000 or $24,000 for those 50 years or older.

The 401(k) accounts are used by millions of Americans, though only about a third of the country saves for retirement through a 401(k) or other retirement account through an employer.

Vince Russell, director of Dayton market for Johnson Investment Counsel, said the changes would discourage savings.

“The idea of a 401(k) deferral is to encourage savings,” he said. “The notion of reducing it from [$18,000] to anything ... you’ll almost be suggesting savings isn’t that important.”

Russell, however, said he doesn’t see the proposal going through, noting opposition from within the financial industry.

Any changes will likely be concentrated to affecting higher income people, said Barry James, president and CEO of James Investment Research, based near Xenia.

“Those with higher income definitely would be more greatly impacted because they have the excess capital to actually put into something like that,” he said.

James said it’s important to encourage people to save for retirement, but tax deferrals might not be the nudge that makes that happen. He pointed to a recent report from Denmark that says tax incentives didn’t have much effect on getting people to save for retirement.

James said he expects that the industries that service 401(k)s will organize to fight any potential changes.

“There are a lot of people who make a lot of money on 401(k)s,” he said.