As the nation eagerly awaits Trump’s new tax plan, proponents of 401k plans are fearing the worse. According to industry insiders, the question is not whether these plans will take a tax hit, the question is how much. With an estimated cost of $90 billion in 2016 due to tax benefits of defined contribution (DC) plans coupled with Trumps expected tax cut for corporations as promised, 401k plans are expected to be on the chopping block.
One of the most popular proposals is to move some of the 401k contributions to after tax Roth plans so the government can realize some of the revenue immediately which would save an estimated $1.5 trillion over the next decade. The question is how much of a saver’s contribution would have to go into a Roth. It also highlights the difference between retirement plans costs and other deductions – the taxes are deferred recouped later. Does the government consider revenue received from withdrawals from retirement accounts as people retire who received tax benefits decades ago?
Another proposal is to tax gains of investments within a retirement plan which would put those plans at a disadvantage to some taxable accounts where gains are taken when the investments are sold at capital gain rates. There’s another $48-$60 billion to be realized by the government from 2018-2015 by taxing gains within a retirement account.
A 2016 proposal in Congress would cap the tax benefit at 25% hurting business owners and high earners who would have less incentives to advocate or even offer 401k plans at a time when engagement of senior management is more critical than ever.
Some may wonder why the government would want to make retirement plans less attractive when know that most people are not saving enough for retirement and that 50% of workers do not have access at work. But 401k plans are most beneficial for the middle class whereas Trump’s political base consists of lower income workers and very high earners for whom these plans are less attractive. Corporate leaders and business owners might be willing to take a hit on their DC plan to get better corporate tax rates.
