What’s the Fate of the 401k Tax Status?

President Trump, taxes, 401(k)
President Trump released his tax plan on Wednesday.

President Donald Trump’s tax reform effort, officially called the “2017 Tax Reform for Economic Growth and American Jobs” exploded in the media on Wednesday. Treasury Secretary Steven Mnuchin said it would be the largest tax cut in the nation’s history.

Trump proposed to cut current provisions that allow individuals to deduct the state and local taxes from their reportable income, something expected to hurt those in high-tax states such as New York and California.

Trump also proposed a 35 percent top tax rate for individuals, down from the current top rate of 39.6 percent. Rates would then be set at 10 percent and 25 percent, and the standard deduction for individuals would be doubled.

The corporate tax rate would fall from 35 percent to 15 percent, and the tax rate on business income reported on individual returns would also drop to 15 percent.

Outright repeals of the estate tax and alternative minimum tax were also included.

No word was given on the fate of the tax-advantaged status of retirement plans, although Mnuchin and National Economic Council director Gary Cohn said certain issues would be addressed later.

The retirement plan industry is keeping a sharp eye on how the tax reform proposal will affect 401(k)s, IRAs and similar retirement savings vehicles.

American Retirement Association CEO Brian Graff noted at the industry advocacy organizations annual conference in March that tax reform in 1986 reduced 401k limits by 70 percent.

“I know for a fact that many Republicans didn’t expect to win the House, Senate and the White House, and now they have to act,” he added.

Trump wants to reform the tax code by “closing loopholes,” but one man’s loophole is another man’s valuable deduction.

“Whatever happens, he [and congressional Republicans] want it to be revenue neutral; it cannot increase the debt and deficit,” Graff predicted.

At one point he paused for dramatic effect, and emphasized, “If tax reform happens, there is no way we come through unscathed. We might think it is crazy to reduce the 401k limit, but you have to understand tax reform is all about tradeoffs. Tax reform is ugly, but we have a seat at the table and are trying to make lemonade from lemons.”

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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