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Gail MarksJarvis: Why your 401(k) is vulnerable as tax reform plays out in Washington

McClatchy-Tribune Information Services

May 8, 2017


If you are counting on 401(k) savings to keep a roof over your head when you retire, donít take your eye off tax reform negotiations in Washington.

Your 401(k) is vulnerable. And worse yet, if tax changes play out as some are proposing on Capitol Hill, you may have the extra burden of picking up the tab for millions of Americans who will go into retirement without enough saved to cover food, housing and other basic needs.

In the halls of Congress, one frequently mentioned way to raise more tax money for the federal government is to drastically change the way about half of Americans save for retirement. Roughly 54 percent of Americans have 401(k)s or other retirement savings plans at work, and the government currently tries to entice workers to participate in those plans by rewarding savers with a tax deduction on whatever they sock away. But the deductions could be on the chopping block as Congress looks for revenue sources to make up for other tax cuts.

The possibility came up in 2014, as Congress looked at tax reform and government researchers calculated more than $144 billion in new revenue over 10 years if some 401(k) deductions were cut, said Brigen Winters, an attorney for Groom Law of Washington, D.C., which lobbies for groups that want to retain the current 401(k) structure. Winters told employers gathered in Chicago for the annual Plan Sponsor Council of America conference Wednesday that "we keep hearing whispers" in the halls of Congress that the 401(k) proposals remain alive. The council is a nonprofit trade group supporting employer-sponsored retirement plans.

There are other possibilities too, such as freezing maximum 401(k) contributions so that workers wonít shelter additional money from taxes in the future. Deductions for individual retirement accounts also could be cut.

While there is nothing formal on the table now, Congress canít make tax cuts unless the cuts are offset by finding other sources of tax revenue, Winters said. And retirement funds are the second-largest potential source of revenue, behind the exclusion employers are given for providing health insurance to workers, he said.

Meanwhile, the only deductions the Trump administration has promised to preserve are those for home mortgages and charitable contributions.

Still, although getting rid of retirement saving deductions could instantly give the government a huge new revenue source, there could be costly consequences for taxpayers. Already the nation is facing a looming retirement crisis because millions of workers arenít saving enough to cover basic needs like food and housing when they can no longer work. Ultimately, if these people need welfare, Medicaid or other aid, taxpayers could be asked to pick up the burden.

The Employee Benefit Research Institute has estimated that workers currently between the ages of 35 and 64 are on their way to being short over $4 trillion in retirement money. And that estimate assumes that those with 401(k) plans keep saving as they have been doing.

Itís clear that if the government cuts out the carrot that entices employees to put money into 401(k)s, many people will stop saving or will save less, said Jack VanDerhei the director of research for the institute, a nonpartisan group.

In an institute survey, 88 percent of people said getting a tax break on their 401(k) contributions was important to them. And moderate- and lower-income people ó who currently save less than more-affluent people on average ó are likely to cut back even more, VanDerhei said.

"The more budget constrained they are, the bigger the negative effect" if they donít get to lower their taxes, he said. "If you are barely scraping by and putting $2,000 into a 401(k), and you lose the deduction and have to come up with an extra $200, you may decide against it."

In the past, both Democrats and Republicans have been tempted to cut back tax deductions for 401(k) contributions. Some Democrats have argued that because affluent people are able to save more in 401(k)s than middle-income workers, 401(k)s give the rich a bigger tax benefit.

But VanDerhei said thatís short-sighted and ignores behavior. In surveys, lower-income people seem to be as anxious to get a tax deduction as higher-income people.

While the possibilities for change remain numerous at this point, Winters said a compromise thatís been discussed would alter some 401(k) deductions. He said individuals could be required to put half of their contributions in Roth 401(k)s and the other half in traditional 401(k)s. The Roth contributions wouldnít be eligible for a tax deduction.

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