Despite President Donald Trump’s Twitter promise Monday that “There will be NO change to your 401(k),” House Ways and Means Committee Chairman Kevin Brady said Wednesday that he and his Republican colleagues are still working on tax proposals that would change your 401(k).
Whether this is politically wise or not, I will leave to others to discern (OK, it probably isn’t), but I figure this is as good a time as any to run through what’s wrong with the 401(k), or at least what’s wrong with having made it a centerpiece of our country’s retirement savings system.
The Republican proposals, as they have leaked out so far, involve reducing the amount of pretax income workers can put in their 401(k) tax accounts from the current $18,000 a year ($24,000 for those 50 and older) to as low as $2,400 a year, and using the budgetary space this would afford for different retirement programs or tax cuts.
It’s not clear at this point if workers would still be able to put $18,000 in after-tax income in a Roth 401(k) instead, or if this limit would be ratcheted down, too. If people could simply shift their savings from pre-tax accounts to Roths, this would be a profoundly silly proposal. Regular 401(k)s are taxed as income when the money is withdrawn; Roth withdrawals aren’t taxed at all. In the 10-year budget window by which the tax plan is being evaluated, a switch from regular to Roth has a positive impact on revenue. Over the long run, it’s a money loser.