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Tax reform: How would the Republican plan affect 401(k) savings? | IN 60 SECONDS

Tax reform: How would the Republican plan affect 401(k) savings? | IN 60 SECONDS


Recently, Congressional Republicans proposed
changing the tax treatment for the 401(k) accounts that most Americans use to save for
retirement. Instead of receiving a tax deduction on 401(k)
contributions, the tax plan would have taxed these contributions but allowed withdrawals
to be tax-free. Opposition to this was strong enough that
President Trump himself came out against it on Twitter, and when Congressional Republicans
released their tax plan in early November, the idea had fallen through entirely. But what was this all about? Some people were concerned that without the
up-front tax break on their contributions, Americans would not contribute enough to their 401(k)s. That’s possible. But other research finds that most employees
will keep saving at the same rates even if the tax preference changes. This could increase retirement incomes, by
having taxes paid up front and making withdrawals tax-free. Whatever the truth is, the Republican sponsors
of the tax bill made no mention of these issues; instead, they focused on using the higher
upfront tax revenues from Roth 401(k)s to pay for a tax cut. What do you think about how the Republican tax plan would affect retirement savings? Let us know in your comments. Also, let us know what other topics you’d like our scholars to cover in 60 Seconds, and be sure to like and subscribe for more research and videos from AEI.

Author Since: Mar 11, 2019

  1. Be interested to see a comparison with other retirement savings plans from around the world, such as Australia's compulsory superannuation system. How do they measure up in terms of likely income provision, security (i.e. how possible is it to lose the savings) and any other aspects that seem relevant.

  2. The answer as to which is better is dependent upon two factors that can differ by anyone:
    1) What tax rates will be when the money is withdrawn – obviously this can only be known with a magic 8-ball. No one knows what future tax rates will be when you want to withdraw in 10-30 years.
    2) What will your income level be NOW vs. when you withdraw. Most people CAN answer this one, and most people can bet that they will have more income to report now when they are employed, vs. when they retire and (generally) have less expenses with a paid off home and such.

    That said, this was an attempt to grab tax revenue quicker from the middle class. Absolutely pathetic in yet another attempt to justify repealing the estate tax from the uber-rich and passing on those costs to the middle and upper-middle class by repealing itemized deductions. As a staunch libertarian that generally supports conservative measures, the republican party can officially go fuck themselves with these shit bills.

  3. There were several issues with the proposal:
    1) There was talk of lowering the maximum contribution that you could contribute to the Roth portion.
    2) People who are maxing out their pre-tax 401(k) contributions are the upper middle class who are having their rates raised in the GOP plan.
    3) The taxes would go to the general fund rather then going to replace social security which is on the verge of collapsing. If the tax were to go towards replacing social security it would be more palatable.

    I've run numbers; you could do a 10% tax on 401(k) contributions, redistribute that to below poverty line households in an IRA type plan. They would end up better off in retirement then the 12% SSA tax we all pay. So taxing retirement contributions isn't terrible, you just have to 1) not jack up my taxes in general & 2) fix something with it (tax breaks for rich donors doesn't count).

  4. My situation is that I need a specific income level to qualify for medical care under the G. I. bill through VA.
    Being able to contribute to a 401k makes that possible. If those contributions no longer reduce my taxable income I will need that money to pay for health insurance and the amount that insurance costs me will be more than the contribution.
    Plus there goes my savings.
    So yeah…I'm against this aspect of the proposal.
    I assume they're doing it because they don't want to admit lowering taxes isn't really workable.
    With stuff like this they're not really lowering taxes at all.

  5. It does make sense to tax savings up front in order to combat inflation, but only assuming 1) taxes will be higher in the future or 2) that Congress won't dick us all over by taxing us on both ends.

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