WASHINGTON – House Republicans are considering a plan to sharply reduce the amount of income U.S. 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 they are expected to release in 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 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.
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 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 a fraction of the $1.5 trillion tax cut Republicans aim 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 practice at accounting firm PricewaterhouseCoopers.
Republicans drafting the tax bill have kept its details closely held, and they would not comment about whether 401(k) changes were under discussion. Republicans on the House Ways and Means Committee "are developing progrowth tax reform policies that will encourage and support retirement savings for all Americans," a committee spokeswoman said.