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401k Tax Cuts Expected in Trump’s Budget Plan

401k tax cuts

What is the fate of 401k tax cuts?

Pending the Trump Administration tax proposals and the President’s new tax plan, most industry professionals are taking a measured view in assessing the impact on 401k plans. Predicting a major cut in 401k plan deductions is the province of hysteria driven by partisan politics and is not a likely outcome. Still, some industry professionals posit the that retirement savers will lose a significant tax benefit under the Trump Administration.  Keep in mind, this is idle speculation at best and not based in fact.

According to USAToday, one proposal is to move some of the 401k contributions to after tax Roth IRA or Roth 401k plans in order to record tax revenue immediately which would be worth $1.5 trillion over the next decade.

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.

Timothy Kelly
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