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 Amounts over $2,400 could be put into Roth 401(k)s, where the money is taxed upfront but not when it’s withdrawn.”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.]