Any day now we’re supposed to know our tax fate or fortune.
On Wednesday, President Trump said, “There’s never been anything like this in the history of our country. It’s cuts and it’s relief and it’s also reform. And frankly, it’s also simplification. So we’re covering everything.”
We shall see. But in the meantime, here’s some reading on how tax reform may affect your money.
— From USA Today: How 401(k)s could change under Republicans’ tax plan
“The biggest potential change is slashing the maximum limit on pre-tax 401(k) contributions to $2,400 a year, down from the $18,000 IRS limit for Americans under 50 and $24,000 for Americans 50 or older in 2017. That would mean savers would be able to stash away fewer dollars in their accounts before income tax is calculated.”
— Weekly Standard: Your Tax Reform Primer: New Rates, What’s Changing, and What It Will Cost
— The Washington Post’s Thomas Heath: Here’s how investors can make money on tax reform
— Wondering if tax reform will even happen? Read this: GOP Tax Cuts Won’t Pass This Year — Or Maybe Even Next
Color of Money question of the week
What would you like to see in the way of tax reform? Send your comments to email@example.com. Put “Tax Reform” in the subject line. Please include your name, city and state.
Live chat today
I’m live every Thursday from noon (ET) to 1 p.m. to take your personal finance questions. This week my guest is Brian Krebs author of last month’s Color of Money Book Club pick “Spam Nation: The Inside Story of Organized Cybercrime — From Global Epidemic to Your Front Door.”
Here’s my review: Terrifying tales of data breaches make consumers want to scream
If you’ve got questions about how to protect your identity online, Krebs is just the expert to tell you how — if that’s even possible anymore. Click this link to join the discussion live or read the transcript later.
Republican tax reform could drastically and irreparably transform 401(k) and other workplace retirement plans
Republicans are considering changes to employer-sponsored retirement plans that would limit the maximum pre-tax amount individuals and married couples could contribute to workplace saving plans such as the 401(k) and federal government’s Thrift Savings Plan.
So last week I asked: What do you think of any proposal to reduce 401(k) contribution limits?
Thomas Cook, a certified public accountant in Arroyo Grande, Calif., wrote, “I will never vote for any member of Congress that supports any measure to reduce the amount that can be contributed into middle-class retirement plans (IRAs, 401Ks, etc.). This makes absolutely zero sense if your core interest is the well-being of the American people.”
Phil S. of West Simsbury, Conn., wrote,” On a five-figure income, along with a disciplined deposit of the maximum, plus a 50 percent supplement by my employer over my last 15 years of working, I’m sitting on a net worth of well north of $1 million. Couldn’t have done this with the Republican’s proposed cap today. Reducing it will sure hurt many!”
Robert Gest from Virginia said, “The Republican plan for reducing the amount folks can contribute is insane. Encouraging people to save less in order to fund their budget plan and enrich the already rich makes no sense. I do hope the members of the Republican base can see that this is not in their best interests and rise up against this. Loyalty is one thing; foolishness is another. As a retired military officer this does not significantly affect me; however, I feel for all the other middle-class people who will be hurt.”
Scott Fossum of Houston wrote, “As one who has utilized the existing limits to the max for many years, it is our largest single part of our net worth. But, I have no lobbyist working for me. I have made zero political contributions. I do vote, and my vote sometimes wins and sometimes loses. The legislation that passes on anything never looks like anything I ever supported.”
“Since beginning my working career about 30 years ago, I’ve contributed to a 401(k) when offered by my employers,” wrote Tamara in Alexandria, Va. “Not all of them offered a 401(k) and of those that did, not all offered a match. When offered, I contributed at least the amount needed to get the match, usually more. I never withdrew funds and when I left jobs, I always rolled over to an IRA, which currently contains nearly $900,000. I work as a government contractor and do not have any other retirement plans besides Social Security. I am still working at age 56 and plan to for another 10 years. I am appalled at the possibility of killing/reducing the tax deductibility of 401(k)s.”
Mike Saylor of Vienna, Va., like some other readers, thought I was being too alarmist.
It’s too early in the tax reform process to be so negative, he said. “Assuming the Roth IRA / Roth 401(k) remain available saving options, the total tax-deferred savings picture should be presented in a more comprehensive and unbiased manner,” he wrote.
I appreciated the feedback. And I understand Saylor’s point that there are other options to save for retirement.
But having worked with hundreds of people and knowing how they handle their money, I believe the proposal for the 401(k) could rollback retirement savings for a lot of people.
Sure there are other options for retirement savings. People can go to a financial institution and open an IRA on their own. But many won’t because they won’t have confidence they will pick the right investments. Having employers set up retirement plans helps cut through the vast choices.
Additionally, the ability of people to easily sign up at work helps with procrastination. Then there’s the herd mentality. They see and hear their co-workers talking about saving in their 401(k) and they follow.
Many employers don’t offer a Roth 401(k). And when they do, less than 10 percent of plan participants that have the option of a Roth 401(k) make contributions into it, according to Willis Towers Watson.
And it’s not a slam-dunk that a Roth is better.
From Money/CNN: “If your firm lets you choose between a traditional 401(k) and a Roth 401(k), try to gauge whether the upfront tax break on the traditional plan is likely to outweigh the back-end benefit of the Roth.”
Roth: “If you’re on the young side or aren’t a high earner, opting for a Roth can be a smart move. Yes, you give up the initial tax break on your contributions — but if you’re not in a high tax bracket, the tax break wouldn’t have been that huge anyway. The Roth option will let you avoid taxes when you’re retired, which is a great thing.”
401(k): “If you’re in a high tax bracket today, a traditional 401(k)’s immediate tax break may be more appealing than the Roth’s deferred gratification — especially if you expect to be in a lower tax bracket when you begin to make withdrawals from your account.”
Why you should think about putting money in both: “It’s always a good idea to make sure your retirement money is “tax-diversified,” meaning split up among accounts that are tax-deferred until retirement, and accounts that are already settled up with Uncle Sam.”
Read more from Money/CNN: Which is better for me — a Roth or a regular 401(k)?
One last reader comment: “I work for a university and my husband is in the private sector in IT,” wrote Laura S. from North Carolina. “We are in our 40s. Neither of us have pensions. All our retirement savings are in 401(k)s, 403(b)s and IRAs. We try to maximize our contributions. Both our employers match our contributions, which is particularly crucial to our savings plans. I’ve seen little in the news about how the proposed changes to the 401(k)s would affect employer matching. I am outraged that the Republicans are considering balancing huge tax cuts for the extremely wealthy by targeting one of the most important retirement savings tools for the middle and upper middle classes. I am fairly well off, and would happily pay more in taxes to help fund better medical care for the poor or to improve our infrastructure. But to take money from me, to jeopardize my retirement, so that they can give more money to billionaires, it’s simply not fair. You are definitely NOT overreacting to this proposal!”
Color of Money columns this week
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