Republicans looking for revenues to help offset the cost of their tax cut plan may be eyeing your 401(k). More specifically, there’s at least some chatter around in Washington about placing new limits on pretax retirement savings. Currently, workers can significantly reduce their tax bills by contributing tax-free money to their 401(k) or IRA plans. The limits are pretty high — $18,000 a year for 401(k)s (or $24,000 if you’re 50 or older) and $5,500 for IRAs ($6,500 for 50 and older).
While no definitive numbers for the potential new rules have been announced, The Wall Street Journal says that a $2,400 annual limit on tax-deferred contributions has been mentioned — which would represent a huge shift for most retirement savers. Another option being discussed is switching to a Roth-style system, in which taxes are paid on retirement savings up front, before they are set aside; withdrawals in retirement are then tax-free.
The goal is to boost tax receipts by reducing a tax break that costs the government billions in lost revenue — $115 billion this year alone. Recapturing some of that cash would go a long way toward paying for the tax cuts of $1.5 trillion over 10 years that Republican are contemplating.
Needless to say, the retirement and financial services industries are not pleased with the idea, and neither are some Republicans. “I’m deeply concerned about it. I don’t think you want to disincentivize retirement savings in any way right now,” said Sen. Rob Portman (R-OH).