Senate Dems Push Back on Rumored 401(k) Changes in Tax Plan

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By Kristen Ricaurte Knebel

Senate Democrats are pushing back on changes to 401(k)s that are rumored to be included in the Republican tax plan that will be unveiled Nov. 1.

Senate Minority Leader Chuck Schumer (D-N.Y.) said Oct. 31 that the Democrats would propose increasing the cap on 401(k) contributions to $24,500 a year for all savers and bump that contribution level up by $6,000 for workers over 50.

The Democrats will also propose a new tax credit for employers that provide matching contributions and establish an automatic individual retirement account for employees who don’t have access to workplace plans, Schumer said at a press conference. He was joined by Sens. Ron Wyden (D-Ore.), Debbie Stabenow (D-Mich.), Sheldon Whitehouse (D-R.I.), and Maria Cantwell (D-Wash.).

The automatic IRA proposal was a favorite of the Obama administration but never gained any footing in Congress. Obama’s Labor Department had a rule allowing states and localities to set up IRAs for savers without access to a workplace retirement plan, but it was axed by Congress earlier this year.

The new plan would “make it easier for Americans to retire in a decent way rather than harder,” Schumer said.

Possible Changes?

Rumors have been swirling in recent days that House Republicans intend to cap the tax-favored amount Americans can put into a 401(k) each year at $2,400. The current limit is $18,000 and $24,000 for workers over 50. Ways and Means Chairman Kevin Brady (R-Texas) and President Donald Trump have been going back and forth about what exactly will happen to 401(k) accounts in this tax plan, but details on the actual substance of the bill have been slim.

Brady said Oct. 31 that he won’t lower 401(k) pretax contributions unless there’s agreement among investment advisers that there is a better retirement savings system.

Brady has floated the idea of raising the overall thresholds for what taxpayers can contribute to a 401(k) retirement account but lowering the amount that gets an upfront tax benefit. The tax-free amount has been reported to be $2,400, but Brady gave an indication last week that that number could increase. Currently, the tax on 401(k) contributions isn’t paid until the money is withdrawn.

Lawmakers have also discussed moving to a system in which contributions are taxed when they are deposited, rather than withdrawn in retirement. This idea, colloquially known as “Rothification,” would mean workers would see a decrease in their take-home pay because they’d have more available taxable income. Some have argued that the appearance of less money in a paycheck would deter workers from deferring funds to retirement savings if they feel they have less money.

If Republicans kept some amount of retirement savings tax-free, there is also the concern that a tax-favored limit of $2,400 could be taken as the recommended amount Americans should save for retirement each year. This would come at a time when Americans need to save more for retirement. The Employee Benefit Research Institute estimated in 2015 that the national retirement deficit to be $4.13 trillion for all U.S. households. The tax bill could include a proposal to establish something called universal savings accounts, something that Brady acknowledged as a possibility last week. House Speaker Paul Ryan’s 2016 tax plan referenced establishing these kinds of savings accounts but didn’t flesh out the details.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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