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Fear not, retirement savers: President Donald Trump’s tax reform proposal would preserve federal income tax deductions for retirement contributions, officials say.
The tax proposal announced Wednesday calls for increasing the standard income tax deduction and eliminating most itemized deductions. But administration officials were initially inconsistent about which deductions — including those for contributions to retirement accounts like a 401(k) — would be eliminated, CNBC reports.
The White House has since clarified, however, that the tax reform proposal would not impact 401(k) contributions, according to CNBC.
Two other deductions that the proposal would preserve are those for mortgage interest and charitable deductions.
Gary Cohn, director of the White House National Economic Council, said Wednesday that increasing the standard deduction and eliminating most itemized deductions are part of an effort to simplify the tax-filing process so that individuals can go back to using a one-page tax form. Cohn explained:
“In 1935, we had a one-page tax form consisting of 34 lines with two pages of instructions. Today the basic 1040 form has 79 lines and 211 pages of instructions. Instead of a single form, the IRS now has 199 tax forms on the individual side of our tax code. Taxpayers spend nearly 7 billion hours complying with these tax codes every year. And nearly 90 percent of taxpayers need some help in filing their taxes.”
Maximizing retirement contributions
As we explain in “8 Ways to Bolster Your Finances in the Trump Era,” contributions to traditional retirement accounts like a 401(k) or traditional individual retirement account (IRA) effectively lower the amount of your taxable income.
That’s because contributions are excluded from your taxable income. In addition, they are tax-deferred accounts, meaning you pay taxes on contributions to and growth in such accounts only when you withdraw the money in retirement.
On the other hand, contributions to Roth retirement accounts — such as a Roth 401(k) or Roth IRA — do not lower your taxable income. You pay taxes on contributions to such accounts up front rather than when you withdraw from the accounts.
If you’re unsure which type of account is best for you, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”
For tax year 2017, you can contribute up to $18,000 or $24,000 to a 401(k), depending on your age. You can save up to $5,500 or $6,500 in an IRA.
What’s your take on how the president’s tax reform proposal would affect tax deductions? Share your thoughts below or on our Facebook page.