Will Congress Limit How Much You Can Save for Retirement?

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If you heard over the weekend that your ability to contribute to a 401(k) plan was about to be severely curtailed, Monday brought a small ray of hope.

To recap in case you missed the news: Reports over the past few days suggested Republicans in the U.S. House of Representatives are considering a steep reduction in the total amount of money you can save in a 401(k) account each year — with allowed contributions falling to as little as $2,400 annually.

However, President Donald Trump appeared to side with retirement savers — and the corresponding tax deduction — on Monday morning, tweeting:

“There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”

Still, the future of 401(k) contributions remains unclear. It is generally Congress — not the president — that has the power to write and rewrite federal laws like those governing 401(k) plans. It is likely, however, that Trump still would have to sign such legislation before it became reality for millions of Americans.

The latest on 401(k) contributions

The New York Times reported Friday that Republicans were considering a change in what are technically known as “contribution limits” as part of their ongoing tax reform efforts. The newspaper cited lobbyists, tax consultants and congressional Democrats.

No 401(k) changes were mentioned in the tax reform “framework” released by House Republicans in late September. But the New York Times reported that legislators were discussing proposals that could reduce workers’ 401(k) contribution limits to as little as $2,400.

The newspaper continued:

“It is unclear if Republicans will ultimately include a cap on contributions in the tax bill that they are expected to release in the coming weeks. Such a move would almost certainly prompt a vocal backlash from middle-class workers who save heavily in such retirement accounts and from the asset management industry.”

A contribution limit of $2,400 would be a drastic change from current tax law.

For the 2017 tax year, you can contribute a total of up to $18,000 — or $24,000 if you are age 50 or older — per year to a workplace retirement account like a 401(k). For 2018, contribution limits for such accounts will rise by $500.

All such contributions are currently tax deductions in the year you make the contribution. The amount you contribute to a 401(k) lowers your taxable income by the same amount. For example, if you contribute $18,000 to your 401(k) this year, the IRS cannot tax you on that $18,000 portion of your 2017 income.

Like money saved in most retirement accounts, cash stashed in a traditional 401(k) is not taxed until you start withdrawing from the account in retirement, as we detail in “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

The latest on GOP tax reform efforts

Americans won’t know for sure whether a sizable portion of their possible 401(k) contribution — or anything else — is officially on Republicans’ tax-reform chopping block until an actual bill is proposed and publicly released.

The U.S. House of Representatives’ Committee on Ways and Means plans to move forward with a tax reform bill after Congress has finalized a 2018 federal budget. Committee Chairman Kevin Brady (R-Texas) explained in a statement issued Thursday:

“When the budget is signed, sealed, and delivered, the Ways and Means Committee will introduce bold legislation that will deliver tax relief, grow our economy, and dramatically improve the lives of all Americans.”

The House passed its version of a budget resolution on Oct. 5, and the Senate passed its version on Thursday. On Friday, Brady told Fox News that Congress could finalize the budget as soon as this week, which means Americans could see a proposed tax reform bill “very soon.”

Brady also said Republicans remain on schedule to deliver a finalized tax reform bill to the president’s desk by the end of the year.

What’s your take on this news? Sound off below or over on our Facebook page.

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