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Financial Planning > Tax Planning > Tax Reform

Democrats Blast Trump Tax Outline, See ‘Rothification’ of 401(k) Plans

By Melanie Waddell

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Rep. Richard Neal, D-Mass., ranking minority member on the House Ways and Means Committee, said Wednesday that he sees a “50/50 chance” that the Trump administration’s just-released unified tax reform framework will pass.

At an event held Wednesday by the Financial Services Roundtable in Washington, Neal said he met Tuesday with President Donald Trump, other administration officials as well as House Ways and Means Committee Chairman Kevin Brady at the White House to talk about the tax reform plan.

(Related: Republicans Tout Simpler Tax Filing as a Goal of Reform)

“I think we’re headed toward blowing another big hole in the federal budget with no guarantees off the growth that you’d need to sustain the numbers that are being proposed” in the GOP tax plan, Neal said at the event.

“At best, tax reform is still 50/50,” he said, considering that the tax plan would cost $500 billion to $1 trillion.

Ron Wyden, R-Ore., ranking minority member on the Senate Finance Committee, blasted Trump’s plan for benefiting the wealthy. “If this framework is all about the middle class, then Trump Tower is middle-class housing,” Wyden said in a statement. “It violates Trump’s tax pledge that the rich would not gain at all under his plan by offering sweetheart deals for powerful CEOs, giveaways for campaign coffers and a new way to cheat taxes for Mar-a-Lago’s loyal members. This continued lack of detail for the middle class guarantees that average Americans will be the ones hit with shrinking paychecks and higher tax bills.”

Senate Finance Committee Chairman Orin Hatch, R-Utah, argued, however, that the GOP “unified framework will launch a robust legislative process and serve as a critical roadmap for the tax-writing committees, as we draft legislation for a tax overhaul that embraces Republicans’ shared vision.”

The plan, Hatch said, provides “much-needed relief – whether it be doubling the standard deduction or expanding the Child Tax Credit – [and] will help lift the middle class and let hardworking families keep more of their hard-earned dollars.”

At the White House meeting on Tuesday, Neal said that Trump was “pretty clear on where he was heading, at least in general terms.”

The administration is “going to try and push for a 20% rate on corporate side,” Neal said, and “lower the top [individual] rate from 39.6% to 35%,” adding that he sees “a lot of room there to negotiate.”

The framework reduces the number of individual tax brackets to three from seven, giving Congress the option to add a fourth bracket for the highest earners.

Also on the table is eliminating the estate tax, which Neal said he sees as “a step backwards.” The plan also calls for eliminating the Alternative Minimum Tax.

Also noted at the Tuesday meeting was the plan to “double the standard deduction,” Neal said.

As the framework states, it eliminates many itemized deductions that are primarily used by the wealthy, but retains tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education and retirement security.

But Neal said that he’d oppose the idea of “Rothification, because I think that will offer a disincentive for people to set dollars aside.”

Rothification of 401(k) plans would mean including plan contributions in workers’ taxable income, converting the plans to post-tax, or Roth, accounts. The move would increase tax revenue in the near term.

Indeed, the Save Our Retirement Coalition – which includes AARP, the American Retirement Association and the American Benefits Council – said in a Wednesday statement that while they were “heartened to see the tax reform proposal did not include misguided policies to reduce savings incentives and tax retirement accounts,” the Coalition remains concerned because reports say some lawmakers “may be considering ‘Rothification,’ which would immediately tax retirement plan contributions and could lead to a reduction in savings and plan sponsorship.”

The Coalition said they will be working to ensure lawmakers “do right by the middle class by preserving and expanding the private retirement system as legislation moves through Congress.”

Neal added at the FSR event that as “we’ve moved from the health care debate, although I’ve warned my caucus members it will be back in some form … to the tax debate,” the “whole notion of what we do about retirement security is really important.”

– Read the tax reform blueprint here.

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