Update: GOP tax plan released, no cuts to 401k contributions
Editor's note: A draft of the House tax reform bill has been released since the publication of this piece, and some details have changed. See our follow-up coverage here.
UPDATE: A draft tax reform bill released by the U.S. House of Representatives Thursday did not include a provision to lower the cap on employees' pre-tax contributions to employer-sponsored 401k plans. See full story here.
- A Republican tax plan calls for lowering the annual pre-tax contribution cap on 401k plans from $18,500 in 2018 to $2,400, according to the New York Times. Nonpartisan tax experts say the reduction is a way to pay for corporate tax cuts. Instead of getting the tax break on contributions up front, workers would have to wait until retirement to see the benefit.
- The Times reports that three out of four Americans haven't saved enough for retirement, and 45% haven't saved any money at all. CNBC cites a study by the Center for Retirement Research at Boston College, which found that balances for 401(k) and individual retirement accounts of people ages 55 to 64 reached a median $135,000 in 2016, up from the 2013 median of $111,000. The savings amounts to about $600 a month in retirement income.
- CNBC also reports that while 54 million people take part in employer-sponsored 401(k) plans (a statistic from the Investment Company Institute), many still lack access to retirement plans because their employers don't offer them or because they're self-employed.
The IRS just announced an increase in the annual 401k pre-tax contribution cap from $18,000 to $18,500 for 2018. The GOP's proposal to drastically reduce the amount employees could contribute pre-tax, however, could be a disincentive for many workers to save for retirement, experts say.
The plan is only in the proposal stage, but employers will need to look ahead at the possible fallout. With fewer plan participants, business would need to consider whether a significant decrease in the contribution allowance would affect their ability to offer retirement savings plans, and whether they can assist workers with financial education.