Commerce Secretary Howard Lutnick dangled a tantalizing possibility during an interview with CBS News last week: No more federal income taxes for people who make less than $150,000 a year.
The head of the U.S. Department of Commerce said such a tax overhaul is part of President Donald Trump’s long-term vision for the country. As he told CBS, “That’s his goal, and that’s what I’m working for.”
Before you break out the celebratory champagne, it’s important to note that many things would have to happen for such a tax plan to become a reality.
First off, Lutnick clarified in a follow-up interview with Fox News that the change would not happen until the U.S. finally balances its budget — essentially meaning the nation’s spending would not exceed its revenue.
As of 2024, federal spending exceeded revenue by more than $1 trillion per year, but Lutnick is hopeful the Trump administration can balance the budget within two to three years.
In addition, a tax overhaul of such revolutionary proportions would need to get through Congress before Trump — or possibly even a successor president — could sign it into law.
If such a long-shot vision did indeed become reality, however, it could dramatically change the financial lives of millions of Americans. As of 2023, 76.1% of U.S. households had a pre-tax income of less than $150,000, according to Census Bureau data.
But if the new tax plan eventually becomes law, there is one group of savers who will likely feel a twinge of regret: Folks with Roth individual retirement accounts (Roth IRAs) and Roth 401(k) plans.
When you put money in a Roth account, you pay federal income taxes upfront — meaning for each tax year for which you contribute to the account. Due to that, you never pay taxes again on your principal or investment gains. So, when you withdraw money from a Roth account in retirement, the withdrawals are always tax-free, provided that you follow the IRS’ rules for these accounts.
This differs from a traditional IRA or traditional 401(k) plan, where you get a tax break upfront, but have to pay taxes on withdrawals. However, the tax change Lutnick floated would change the picture dramatically for folks with these types of accounts.
Many people make far less than $150,000 a year in retirement. That means that if Trump’s vision of eliminating federal income taxes on people making less than $150,000 becomes reality, many savers who have used traditional IRAs or traditional 401(k) plans to save for retirement would likely never pay taxes on most — or all — of their withdrawals in retirement.
In essence, they will have gotten a tax break for each year for which they contributed to a traditional retirement account, but would not face any taxes on their withdrawals during retirement.
Overnight, traditional IRAs and traditional 401(k) plans would be transformed into something like a health savings account, another type of tax-advanaged account. With HSAs, account holders who follow the IRS rules never pay taxes on any of the money they put in their accounts.
On the other hand, those who have contributed to Roth IRAs and Roth 401(k) plans never received a tax break for the year of contribution. While their withdrawals in retirement would remain tax-free under the new tax plan, they would likely lament having sacrificed tax breaks earlier in life for no apparent benefit.
It’s important to emphasize again that the odds are against such a radical change to the tax code. But the fact that it’s being discussed at all is a reminder that tax laws can quickly change, and in ways few people would expect.
For that reason, it can pay to plan for all eventualities. One way to do that is to have a mix of traditional and Roth accounts instead of putting all your eggs in the Roth basket.
For more about these types of accounts, check out “Which Account Runs Out of Money Sooner: Traditional or Roth?.”
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