A day before the House Ways and Means Committee is set to introduce a tax bill that’s said to limit pre-tax 401(k) savings to $2,400 per year, Senate Democrats released what they argued is “a better plan” that lifts the cap on such contributions and creates a new auto-IRA option.
House Ways and Means Chairman Kevin Brady, R-Texas, “has refused to rule out a middle class tax on Americans’ retirement,” Senate Democratic Leader Chuck Schumer, D-New York, said during a Tuesday morning press briefing. “We Democrats are here to say that we vigorously oppose any tax hike on middle class retirement accounts, and that we have a better plan to make it easier for Americans to save for retirement rather than harder.”
Brady said on Oct. 23 that GOP lawmakers are indeed “taking a fresh look” at savings vehicles in the tax reform bill.
“The Republicans are not proposing changes to retirement savings because they are anti-retirement savings, they are doing it because they need to raise revenue to offset the lost revenue from the proposed reduction in tax rates,” Andy Friedman, head of The Washington Update and former tax attorney, told ThinkAdvisor on Tuesday. “The Democratic proposal does nothing toward that goal. In fact it does the opposite, proposing a change to the tax code that would reduce government revenue even further.”
During the Tuesday briefing, Schumer said the Senate Democratic plan would lift the cap on pre-tax contributions for 401(k)s, create a new tax credit for companies who will match 401(k) contributions, and create a new auto-IRA program “for the one half of American workers under age 65” who don’t have access to an employer-sponsored retirement plan.
Friedman opined that “it’s too early to tell” if the GOP plan to limit 401(k) contributions will make it through the House and Senate unscathed. “The Republicans may have to change the provisions they have inserted to raise revenue depending on whether they can get the votes for the full package in the House and Senate.”
As it stands now, for 2018, workers can save up to $18,500 in 401(k) accounts, with those age 50 and older allowed to save an extra $6,000.
The Democratic plan expands the amount to $24,500 in 401(k) accounts, retaining the ability to save on a pre-tax basis, and the $6,000 extra for those age 50 and older.
“We have been slack-jawed at the idea that they [GOP lawmakers] just cannot keep their hands off your 401(k),” added Senate Finance Committee Ranking Member Ron Wyden, D-Ore. “[T]he President reeled them [GOP lawmakers] back in, and Mr. Brady put it back on the table once more.”
On top of 401(k) cuts, Wyden continued, GOP lawmakers “are in the process of scraping a rule that says financial advisors to retirement plans have to work in their clients’ interest,” referring to the Department of Labor’s fiduciary rule. “Put your arms around that. That is really a radical idea: that the financial advisor should have to actually be working in the client’s best interest.” That rule, “is in the process of being scrapped as well.”
In a joint statement releasing their plan, Senate Democrats said that the Republican tax plan – due out on Wednesday – is not only “rumored to limit pre-tax 401(k) savings to a paltry $2,400 per year,” but that it will also use “the budget gimmickry of ‘new’ taxes paid on 401(k) contributions to finance tax cuts for millionaires and corporations.”
Argued the Democrats in releasing their plan: “Since pre-tax treatment for 401(k) contributions is only a tax deferral (because distributions from 401(k) plans at retirement are taxable), these new ‘taxes’ on contributions are not new revenue at all, but merely a shift of taxes currently paid outside the 10-year budget window to inside that window.”
Such a plan amounts to “using funny money to pay for tax cuts,” which “will lead to revenue shortfalls in the future, and will be used by Republicans as an excuse to cut funding for vital programs,” the Senate Democrats said in a joint statement.
Once the House GOP tax bill is released Wednesday, Brady has said the Ways and Means Committee will start marking it up on Nov. 6.
Schumer stated at the Tuesday morning briefing that “We’re going to be focusing on taxes for the next several weeks.”
Schumer also came out against Brady’s plan to end the deductibility of state income tax. “Brady is now making clear that the Republican tax plan will double tax the income of millions of Americans,” Schumer said. “If any American needed more proof this bill would be a boon for the wealthy at the expense of the middle class, they should look no further than this provision.”
Greg Valliere, chief global strategist for Horizon Investments, stated in his Monday commentary that once released, Brady’s tax bill “will immediately become a target, with opposition to changes in the state and local tax, 401(k) plans, the deductibility of mortgage interest and dozens of other provisions.”
Democrats, Valliere said, “will howl that the bill favors the wealthy.”
Brady “wants this [tax bill] to move quickly through the House, and if [FBI Director Robert] Mueller is the dominant story,” Valliere said, referring to his investigation of the Trump administration’s ties to Russia, “Brady’s tax steamroller could get lost in the noise.”