House Republicans are considering a plan to sharply reduce the amount of income American workers can save in tax-deferred retirement accounts as part of a broad effort to rewrite the tax code, according to lobbyists, tax consultants and congressional Democrats.
It is unclear if Republicans will ultimately include a cap on contributions in the tax bill that they are expected to release in the coming weeks. Such a move would almost certainly prompt a vocal backlash from middle-class workers who save heavily in such retirement accounts and from the asset management industry.
The proposals under discussion would potentially cap the annual amount workers can set aside to as low as $2,400 for 401(k) accounts, several lobbyists and consultants said on Friday. Workers may currently put up to $18,000 a year in 401(k) accounts without paying taxes upfront on that money; that figure rises to $24,000 for workers over 50. When workers retire and begin to draw income from those accounts, they pay taxes on the benefits.
Rumors have circulated for months that negotiators were debating including a cap as a way to help offset the revenue loss from a reduction in business tax rates that Republicans have put at the center of their plan. Reducing contribution limits would be, in effect, an accounting maneuver that would create space for tax cuts by collecting tax revenue now instead of in the future.
Such a move would be likely to push Americans to shift their savings to so-called Roth accounts, where contributions are taxed immediately, and not when they are drawn out as benefits. That would increase federal tax receipts for the short run.
The congressional Joint Committee on Taxation estimates that tax exclusions for individual retirement contributions will cost the federal government $115 billion for the 2018 fiscal year. That is just a fraction of the $1.5 trillion tax cut over a decade that Republicans are aiming to enact.
In addition to being politically problematic, including a cap could also complicate the tax bill’s prospects in the Senate. Under the rules of budget reconciliation — the method Republicans are employing to avoid a Democratic filibuster of the bill — legislation cannot increase budget deficits after a decade. Shifting revenue by lowering 401(k) limits “raises money early, but loses money late, and that’s exactly the opposite of what you want in a reconciliation bill,” said Rohit Kumar, a former Senate aide who leads the tax policy services practice at PricewaterhouseCoopers, an accounting firm, in Washington.
Republicans drafting the tax bill have kept its details closely held, and they would not comment on Friday about whether 401(k) changes were under discussion. Republicans on the House Ways and Means Committee “are developing pro-growth tax reform policies that will encourage and support retirement savings for all Americans,” a committee spokeswoman said.
The tax framework that President Trump and congressional Republican leaders released last month promised to retain “tax benefits that encourage work, higher education and retirement security.” It left the door open to changes in the current system, saying that “the committees are encouraged to simplify these benefits to improve their efficiency and effectiveness.”
Democrats have seen firsthand the perils of proposing changes to savings accounts. In 2015, an outcry forced President Barack Obama to quickly back off his proposal to change the tax benefit of college savings plans known as 529 accounts.
On the Senate floor on Thursday, Senator Gary Peters, Democrat of Michigan, warned that the Republican majority was “keeping open the possibility of raising taxes on Americans who are trying to save for their retirement.”
In a statement on Friday, Representative Richard E. Neal of Massachusetts, the top Democrat on the Ways and Means Committee, said that the Republican proposals “would hurt those saving responsibly for retirement at a time when an alarming number of families have fallen behind in their retirement savings.”
A study by researchers at Harvard and Yale, released in 2015, found no evidence that the timing of when savings accounts are taxed affects how much Americans save.
Source: The New York Times