Pre-Tax Retirement Contributions at Risk in Tax Reform

Pre-Tax Retirement Contributions at Risk in Tax Reform

If you like the income tax reduction you get for your 401(k) contribution then make sure to max out now, because you may not get the chance in the future. Tax reform proposals of past years from both political parties have targeted the break people get for 401(k)s because it is a gigantic source of untaxed money – perhaps more than $580 billion over five years, according to a 2016 Joint Committee on Taxation estimate. The Tax Policy Center suggests that Congress needs to find $2.4 trillion over 10 years to avoid increasing the deficit with the current tax reform proposal. So the temptation to end the 401(k) tax break could be intense. Currently, 401(k) contributions come from pre-tax earnings, and the government waits until you take the money out in retirement to tax it and the returns it has earned. If Congress gets rid of this system, saving for retirement would be more like saving in a Roth IRA or Roth 401(k). With a Roth, you do not get any tax benefit when you contribute, but the money grows tax-free in the accounts. These accounts are also not subject to required minimum distributions, which retirees must take from 401(k)s beginning at age 70 ½.

 

Source/more: Reuters