Last week, the Trump administration introduced their proposal to reform the tax code. There are a number of significant changes, such as fewer tax brackets and a larger standard deduction.
However, there’s another significant change that’s not getting talked about as much, but which is of great importance to anyone saving for retirement. Under President Trump’s proposed tax plan, 401(k) contributions would no longer be tax-free.
Current 401(k) Tax Laws
If you currently contribute a portion of your income to a 401(k), the maximum amount you can put in annually is $18,000. That number increases to $24,000 if you’re age 50 or older, to give you a chance for your retirement fund to catch up before you need to start using it. In the past, those contribution limits have gone up every year to coincide with inflation, but for the last three years, those maximums have stayed the same.
To incentivize workers to plan for their future and make the maximum allowable contribution each year, federal tax law defers taxes on the money you put into your 401(k).
You don’t even have to list it on your tax form to get the break. The money is taken out of your paycheck pre-tax, and you don’t have to worry about it until you retire and start collecting on what you’ve saved up, at which point, whatever you take out is subject to taxation.
The Proposed Changes
Under the new tax proposal, the situation would be reversed. You would be taxed on your 401(k) contributions, just like any other income. However, the money you withdraw from it in retirement would be tax free, much like Roth IRAs and Roth 401(k)s.
The purpose of cutting this and other tax breaks is to increase revenue for the government. The Joint Committee on Taxation believes that taxing 401(k) contributions could raise an additional $584 billion by 2020 and $1.5 trillion by 2027.
However, the Bipartisan Policy Center disagrees. They argue that those figures don’t take into account the tax income currently coming in from retirees withdrawing from their 401(k)s, which would be lost under the proposed plan.
Additionally, it’s worth noting that the reason for the tax break is to provide workers with an incentive to save for the future. By removing that incentive, suddenly contributing to your 401(k) becomes more expensive, with less return. Under those circumstances, it’s likely that many Americans will contribute less to their plans annually, if not forego it altogether.
Furthermore, that failure to increase tax revenue to expected levels then opens another dangerous door. Once the contribution tax break is closed, future lawmakers could enact legislation to tax the income received from a 401(k) as well and get people both coming and going.
What to Do
Bear in mind that thus far, the elimination of the 401(k) contribution tax break is just a proposal. It hasn’t yet become law, and in fact, is likely to face significant opposition. On the other hand, it’s also important to remember that members of Congress don’t contribute to 401(k)s.
Once a congressperson has served at least five years, they receive pensions based on how long they’ve been in office. Therefore, changes to 401(k) tax breaks won’t affect them, which may make them more likely to vote to eliminate them or otherwise alter them in a way that could be harmful to the average citizen.
In this situation, it may behoove you to have more of your money in a gold IRA. Tax breaks for IRA contributions haven’t yet come under fire, and though contribution limits are lower ($5,500 per year, or $6,500 if you’re over 50), you can claim those contributions as deductions on your tax form and not have to pay taxes on the money until you start withdrawing it.
A Gold IRA has other benefits as well. It’s not subject to inflation but retains its value over time. The markets in which your 401(k) contributions are invested can also quite often be volatile, making it difficult for your savings to appreciate significantly over time. Gold, however, goes up over time in the long run, regardless of what stocks are doing, providing a great safe haven for your investment.
The future of your retirement savings is uncertain. Don’t wait to act until the new laws have already gone into effect, as by then it may be too late. Act now to protect your nest egg and keep your retirement safe.