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401(k), IRA Changes On Tax Reform Table Despite Trump's 'No Change' Tweet

This article is more than 6 years old.

Update: See House Tax Bill Addresses 401(k)s, IRAs, Drop Rothification.

Despite President Donald Trump’s tweet “There will be NO change to your 401(k)” it’s too early to let your guard down as tax writers search for revenue to pay for proposed corporate and individual income tax cuts in the GOP tax overhaul plan.

“It’s nice that President Trump is protective and appreciative of the value of the 401(k), but we don’t think for a second that the Rothification proposal is off the table; we think it’s still a big, real viable issue and people need to be aware of it,” says Nevin Adams, chief content officer of the American Retirement Association in Arlington, Va.

And here’s another looming question with a big impact for inheritors: Will a new five-year payout rule for IRA and 401(k) inheritors resurface? That was a revenue raiser in the 2016 Retirement Enhancement And Savings Act that unanimously (26-0) passed out of the Senate Finance Committee. It would limit the “stretch” 401(k)/IRA rules that let non-spouse beneficiaries extend tax-deferral over their lifetimes, requiring any amounts over $450,000 across all accounts to be paid out over five years. Beware. Tax writers are looking at RESA as a road map for tax reform, Adams says.

The Rothification proposal is to put a new limit of $2,400 on pre-tax 401(k) contributions (workers could still save on an aftertax basis in a Roth account up to the current limits of $18,000 a year/$24,000 a year for those 50 and older). Employers don’t like the Rothification proposal because they’re worried that if you take away pre-tax incentives, workers will save less. The American Retirement Association’s viewpoint: Limiting employee’s tax deductions for 401(k)s in the absence of other meaningful changes to promote retirement savings by middle class families would be inconsistent with the Trump-GOP tax framework. One idea is to enhance the retirement saver's credit.

The RESA vote proved that retirement tax reform can be bipartisan, and it contained a lot of sweeteners. Here are some more of its provisions that could make it into tax reform legislation:

  • allow individuals to contribute to traditional Individual Retirement Accounts past the age of 70 ½
  • remove the 6-month ban on contributions following a hardship withdrawal
  • expand the 401(k) start-up tax credit for employers with up to 100 workers from $500 to up to $5,000
  • create a new $500 employer tax credit for implementing automatic enrollment
  • remove the 10% automatic enrollment savings cap