Retirement Plan Industry Frets Over Rumored Pre-Tax Contribution Cuts

401k, retirement, tax cuts, retirement plans
Possible cuts cause industry consternation.

Financial industry advocacy groups are worried over reports of major cuts to pre-tax retirement plan contribution limits, including 401ks.

The Hill reported Friday that “the potential change that people following the tax bill are hearing about would lower the maximum annual contribution to $2,400. Amounts over $2,400 could be put into Roth 401(k)s, where the money is taxed upfront but not when it’s withdrawn.”

On Thursday, the Internal Revenue Service announced contribution limits for employees who participate in 401k, 403b, most 457 plans, as well as the federal government’s Thrift Savings Plan, will increase from it’s current $18,000 to $18,500 in 2018, barring any cuts as part of a potential tax reform deal.

“It’s unclear how seriously lawmakers are considering reducing the cap on pre-tax contributions to 401(ks),” The Hill added. “But industry groups are worried that dramatically lowering the cap on pre-tax contributions would reduce the amount that people save for their retirement.”

About 55 million Americans participate in 401k plans, which now hold more than $5 trillion in assets, according to the Investment Company Institute.

Investors with 401ks and similar defined contribution (DC) plan accounts value the control and choice of investment options offered in their plans, ICI notes.

“401k plans feature a diverse array of investment options (more than 20 on average), which help investors create a diversified portfolio for their age and investing horizon,” ICI said.

In addition, 401ks provide a cost-effective savings vehicle, not only because of their tax advantages but also because 401 mutual fund investors tend to concentrate their assets in lower-cost funds.

In an ICI household survey conducted in fall 2016, 75 percent of all US households surveyed indicated that they were either “somewhat” or “very” confident in the ability of 401ks and similar retirement plans to help individuals meet their retirement goals.

For households owning at least one DC account or individual retirement account (IRA) in fall 2016, that confidence was higher, at 82 percent. Even among households not currently owning retirement plan accounts, a 63 percent share expressed confidence in the savings power of these plans.

[Editor’s note: Headline updated to clarify cuts would involve contribution limits that are pre-tax.]

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.

2 comments
  1. The odds of that happening are the same as the odds of Kim Jong Un having dinner at the White House.

  2. This is flat out terrible. Pensions get removed and replaced by 401k’s so individuals are responsible for their own saving. Now we want to remove the ability for individuals to save in a tax efficient manner? What happens when social security goes bust? If you put away $2,400 for 30 years and earn 8% annualized you will have $271,880 at retirement. If you spend $50,000 a year after retirement and still earn 8% (aggressive for retirement funds) you will run out of money in 8 years. Hope you don’t live too long!!!!!

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