trump tax plan, retirement savings, 401k, 401k cap
Trump's plan to cut taxes might get paid for with your retirement savings. Photo: Flickr

Republicans are learning that cutting taxes is expensive, and as they try to come up with a way to pay for the largest tax cut in U.S. history, it’s your 401k retirement account that could be on the losing end.

 

The Trump administration and the GOP congressional caucus agree on slashing taxes for individuals and businesses, but doing so will cost the government money. One idea to pay for the sweeping cuts would limit the amount of pretax money households can put into retirement savings accounts. One proposal lawmakers are reportedly considering would limit 401k contributions to $2,400 a year, which basically means no one will ever be able to retire, according to Market Watch.

 

Currently the limit is $18,000, according to the IRS.

 

Limited to saving just $200 per month, a 21-year-old New York worker making $55,000 a year, will have to work to the ripe age of 78 in order to have enough money to retire, according to SmartAsset’s retirement calculator. That will leave you $3,128 a month to cover rent, bills and all your expenses for the next 17 years until you die at 95. If you live longer than 95, sorry but you’ll be broke.

 

401k, 401k cap, retirement savings, retirement account

 

It’s a move that won’t much change the total amount of tax money going to the government, The Week reported. Bringing taxes on retirement savings in sooner, however, would let the government make it appear more money is coming in so that when the Congressional Budget Office crunches the numbers the GOP tax cuts, it appears to be a budget-neutral move. The office only calculates the budget impacts over a specific window of time.

If Republicans push for a cap on pretax retirement savings, it will have major implications for the way Americans save. Right now, most Americans sock retirement money away in a 401k or traditional IRA account — the money goes into the account untaxed and earns interest over time. The tax man doesn’t get to touch your money until you hit retirement age and start withdrawing.

Another kind of retirement savings account, called a Roth IRA, taxes your savings going in. It earns interest and grows over time like traditional IRA accounts, but when you retire and start to withdraw from it, the money comes out tax-free.

What Republicans are proposing is a so-called “Rothification” of retirement savings. It’s a move that won’t much change the total amount of money going to the government, but The Week reported the switch would let the government make it look like it’s making more because more tax would be coming in earlier the GOP tax cuts will only be evaluated within a specific budget window.

“In fact, depending on how it's designed, the 401k proposal could even lose the government money, given that the pot of money taxed on the front end is smaller than the pot of money taxed on the back end,” The Week reported.

Republicans are eyeing some alternatives to a 401k cap. Politico reported back in August that other "options include capping the mortgage interest deduction for homeowners; scrapping people's ability to deduct state and local taxes; and eliminating businesses' ability to deduct interest."