Your Retirement Plan May be on the Chopping-block and the Roth 401k Could Come to the Rescue
The U.S. Government has forecasted sweeping-change for the US taxpayer and your 401k plan may be a part of that change.
On April 20, 2017 the Wall Street Journal online reported U.S. Treasury Secretary Steven Mnuchin stated, the Trump Administration plans to release its tax reform proposal very soon, promising that a sweeping overhaul of the tax code will get done. The administrated has made it clear that Tax Reform is one of the front-burner priorities needing to be addressed.
What Tax Reform Means in Washington-Speak
Three tenets come to mind when discussing this administration’s sweeping tax reform:
- Reduce Tax Rates (for individuals and corporations);
- Simplify the Tax Code; and
- Maintain Funding at a level which will sufficiently fuel the U.S Government and the economy.
Reducing Tax Rates and Simplifying the Tax Code are easy for politicians and the general public to comprehend and embrace. However, Maintaining Funding -levels, in Washington, is interpreted in a variety of ways and unfortunately it carries different meanings depending upon “what side of the aisle” one calls home. When reducing taxes – the reduction needs to be offset by additional funding come from another source.
Congress can only legislate tax cuts when that revenue can be made-up in some other way. (Note bullet point three above.) As was recently reported in the chicagotribune.com, the only deductions the Administration has promised to preserve are the Home Mortgage deduction and the Charitable Contribution deduction. Thus, leaving everything else on the chopping-block.
Impact on Employees’ and their 401k
Employers funding employee healthcare is the largest deduction and potential source of funds for the U.S. Government. Employer funded healthcare benefits are not likely to be eliminated as the country needs to maintain a healthy working population. The Retirement Savings Deferral (not deduction – as it is repeatedly erroneously referred to), is the next largest potential source of funds for the U.S. Government.
There are multiple levers-of-change options available to the U.S. Treasury which could have significant ramifications on Participation Rates, Savings Rates, Asset Growth and Tax-deferred Status of the participants’ contributions. Examples of how the 401k could be impacted include:
- Remove the 401k Deferral for all workers;
- Remove the 401k Deferral for all workers with an Adjusted Gross Income (AGI) over X;
- Leave the Roth 401k feature available for all employees with an AGI over X; or
- Require that all 401k contributions are split 50/50 between a Traditional 401k tax-deferred account and a Roth 401k account (meaning that only 50% of an employee’s total 401k contribution would be able to be deferred on IRS filings in future tax-years.)
The 401k plan and the corresponding structure is the most successful self-funded retirement scheme on the planet. No one in the retirement plan industry feels that it makes sense to tinker with the existing 401k tax structure; however in the current political environment of sweeping tax reform, all 401k plan participants must realize – with the exception of the home mortgage deduction and the charitable contribution deduction – everything is “on the table.”
Considering the above options, – the 50/50 (Traditional 401k/Roth 401k) would deliver a significant revenue boost to the U.S. Treasury without totally discouraging retirement savings by the American workforce.
