401K Contributions Limit Increases for 2018...But...
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“The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500.”
But…
“Lobbyists and others in the retirement and financial services industries who have spoken to congressional staff and committee members say lawmakers are looking at proposals that would allow 401(k) participants to contribute significantly less than what is currently allowed in a traditional tax-deferred 401(k). An often mentioned amount is $2,400 a year. It isn’t clear whether that would only apply to 401(k)s or IRAs or both.”
“Under some of the proposals being floated, contributions above the amount set for tax-deferred savings would have to go into a Roth account. The change wouldn’t affect existing balances in traditional 401(k)s and IRAs, those people said, and it is likely that any matching contribution from an employer would continue to go into a tax-deferred 401(k) account.”
Paywall workarounds:
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Putting $2,400 into retirement savings a year isn’t much, especially considering traditional pensions are basically non-existent. I don’t think such a draconian change will be made, but who knows. Our crooked politicians are probably thinking of doing this, as many retirement savers don’t think things out. If people are averaging $10,000 a year in contributions now, and all of a sudden can only contribute $2,400, their paychecks will go up $7,600 a year (minus taxes). Many people will think they’re flush with new money, and start blowing it on junk they don’t need, instead of saving it for retirement elsewhere.
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They’re only considering limiting the amount that would be pre-tax to $24oo. The rest would be Roth. Still, the scenario you outline could very well happen. Many people who are only contributing for the tax break might do that.
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There are sound arguments that show Roth 401k is better than the regular 401k. So at least for me, I think it would be neutral - I would still max out my contributions.
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I don’t like the idea of taking the choice away.
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Tangent:
You also need to pay attention to your 401k fee’s.
My husband’s employer matched 50% up to 7% of his paycheck, so that’s what we’ve been putting in that past 15-20 years. Then thanks to being able to access his 401k account online a couple of years ago, I then saw the management fees being charged every month to his account. What the heck? I have his $ invested in mutual funds (Wells Fargo as the administrator). I got busy and looked closer at his rate of returns and realized that my Roth IRA through Vanguard was giving me a higher rate of return even though I was putting in a piddly amount each month.Husband had a hard time giving up his “free” employer matching, but he is getting a much better return on his savings we put into his personal Roth IRA.
Our investments are such that I don’t think we’ll be in the lowest tax bracket when we retire (and don’t have kids to write off, lol), so the tax-free (retirement withdrawal) Roth also makes more sense.I still have 1% of his paycheck going to his 401k. Last year they added on a Roth 401k option, so I switched him to that. His income varies depending on the amount of overtime he works every week, so I do have to watch the limits of what he’s contributing to each.
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The match is free money. An instant 50% return on investment. No outside investment choice could possibly make up for the loss of that free money regardless of what the fund fees look like.
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@mom2jel said in 401K Contributions Limit Increases for 2018...But...:
I then saw the management fees being charged every month to his account. What the heck? I have his $ invested in mutual funds (Wells Fargo as the administrator). I got busy and looked closer at his rate of returns and realized that my Roth IRA through Vanguard was giving me a higher rate of return even though I was putting in a piddly amount each month.
You’re pretty much limited to whatever choices the administrator gives you. Trying to compare returns at Wells Fargo with Vanguard is only useful if you have access to all of the funds at both places and could switch to funds with lower costs across the board.
Agree wholeheartedly with @tjtv that you’re walking away from free money. Best to go back to the 7% match. Even the most conservative person would be well-served by putting the money in a money market mutual fund with it’s bottom of the basement returns, if such an option is available in the plan.
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@tjtv I’ve also looked at this as the ultimate bargain for an employer. Instead of all the costs in providing traditional pensions, just add 5% to employee salaries for 401k matches, with no other costs or liabilities.
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@burgerwars said in 401K Contributions Limit Increases for 2018...But...:
@tjtv I’ve also looked at this as the ultimate bargain for an employer. Instead of all the costs in providing traditional pensions, just add 5% to employee salaries for 401k matches, with no other costs or liabilities.
Agree with @Burgerwars, and an even bigger benefit for the employer because many people won’t participate or not at a level where they get the full match. Also puts all of the investment risk on the individual rather than on the company.
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There won’t be any decrease in contribution amounts. POTUS has spoken http://nymag.com/daily/intelligencer/2017/10/trump-promises-his-tax-plan-wont-limit-401-k-contributions.html
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I did read that also, at a different site. I do hope that turns out to be true.
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this should have ZERO impact, on your personal responsibility for your own savings and planning for your future.
would certainly be a bummer, but usually when one door closes…
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@skh12 said in 401K Contributions Limit Increases for 2018...But...:
this should have ZERO impact, on your personal responsibility for your own savings and planning for your future.
Agree. I’ve never understood people who say that because their company doesn’t offer a 401K, that they can’t save for retirement. IRAs and any other savings vehicle are available. It’s just that not all of them are tax-advantaged.
But that isn’t really the point here.
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@robl said in 401K Contributions Limit Increases for 2018...But...:
There won’t be any decrease in contribution amounts. POTUS has spoken http://nymag.com/daily/intelligencer/2017/10/trump-promises-his-tax-plan-wont-limit-401-k-contributions.html
And in other news:
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If they lower the pre-tax deferral limit, we will lose several decades of progress on retirement security for Americans.
This concept, being referred to as “Rothification” is viewed as a tax revenue raiser in Washington thanks to their use of a 10-year budget window. The reality is that 401(k) pre-tax contributions result in DEFERRED TAXES, and not lost tax revenue. But when you only look at the puts and takes of the next 10 years, you only see a bunch of money coming in if they were to limit the 401(k) pre-tax limit to a lower amount and allow the remaining amount up to $18,500 to be Roth.
This will definitely hurt many/most workers who participate in 401(k) plans in one or more of the following ways:
First, for the working class/middle class/upper middle class (let’s pick a number of say $150k/year), they stand a good chance of losing out on the main tax benefit of 401(k) pre-tax deferrals – saving tax at their marginal tax rate in their working years, and paying tax when they withdraw the money in their retirement at their effective tax rate in retirement. Most of those people will not be the the same tax brackets in retirement. Those that make substantially more than $150k will likely not be in a materially lower tax bracket in retirement, so they don’t really benefit today from the tax arbitrage opportunity. Also, the states often follow the Federal rules so many states don’t tax 401(k) pre-tax contributions and if the residents move to low/no state income tax state in retirement, those 401(k) pre-tax contributions would never incur state taxation, whereas Roth contributions are taxed.
Second, there has been some good progress made in the past 10 or so years automatically enrolling (and in many cases automatically escalating contribution rates) for employees at many companies. Inertia plays a role in this as the employees don’t have to do anything – there are some that think that same employee inertia won’t result in people reducing their contributions, but I disagree. Employees are going to get a cut in take home pay, which will clearly show up on their paychecks as additional tax withholding. So by the same Washington logic of just looking at the current tax situation, every contributing worker is going to see their tax withholding go up and their net paycheck go down if this becomes law. Some/many will reduce their contribution rates as a result of this and beyond saving less of their own money, they may also lose out on some portion of their company matching contributions as a result.
Third, I can see many employer plans offering an option to contribute X% of pay not to exceed the pre-tax contribution limit (e.g., $2,400) and then Y% of pay as Roth. Employees who choose that option will likely save less and also may receive lower company matching contributions as a result of this if they don’t contribute enough to maximize the match.
Fourth, let’s go back to that 10-year budget window that Washington uses. What’s going to happen in 10-20 years from now when more retired people are drawing down Roth funds and not paying taxes? With lower tax revenue, Washington will need to raise taxes some other way. Guess what will look like a nice fat piggy bank to them at that time – yep, those Roth 401(k) plans. Someone will inevitably point out that there were investment returns that were not taxed, and I can just see what that will lead to. If you don’t think it will happen, look at Social Security – it was originally tax free, then it was taxed up to 50% (in theory the employer portion), and now I believe up to 85% is taxable for some higher earners (the 15% representing an estimate of the post-tax payroll taxes).
If Rothification is necessary to get tax reform to work, then the limit should be set at one-half of the current limit. In other words, using the 2017 figures as a proxy (since the numbers are rounder), let the first $9,000 be traditional pre-tax 401(k) and the other $9,000 to get up to the $18K limit be restricted to Roth. That way someone making $150K can contribute 6% pre-tax and still be under the limit (my upper-middle class example). Those putting in more than $9K can do the excess as Roth, and most aren’t likely to be in a materially higher tax bracket in their working years than they will be in retirement.
They can even present $9k it as a tax increase on the more well to do (looking solely at the 10-year budget window), and in fact it may not increase the overall, long term taxes at all on many of those that would be affected at the $9K level. For example, whether I put in $9k pre-tax or $6K Roth, assuming a 33% combined Federal & State effective tax bracket in all years makes me completely indifferent.
Actually, Roth can be very beneficial for a higher tax bracket earner who already maxes out their 401(k) and saves elsewhere on an after tax basis – by using Roth they can potentially shelter more investment income from ever being taxed. The math gets a little fuzzy but if someone was going to max out their 401(k) and then save more elsewhere, they might be better off doing Roth. For this example, assume someone is in the combined 33% tax bracket and can afford to save $27K of gross pay.
- If they were to save $18K pre-tax and another $6K in a non-401(k) account ($9K gross, less 33% witholding leaves $6k).
- Alternatively, they could save $18K Roth ($27K less $9K in withholding).
Let’s just assume a 20-year time horizon and those investments triple in that timeframe (which equates to slightly less than a 6% compound return), and again assuming the same tax rates of 33%, the combined pre-tax/post-tax account would be worth $72K, $66K of which is taxable at 33% resulting in a $22K tax liability. That leaves $50K of tax free retirement income. The Roth account is now worth $54K, and unless Washington reneges on the Roth promise, there is no tax liability.
Sorry for ranting – this is personally a sore point for me as someone who has saved 10% or more (including company match) in 401(k) plans for more than 25 years. I realize most don’t have that luxury of being able to afford to save that much and/or don’t have a company match, but we already have a retirement crisis in this country and this is NOT going to make it any better.
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@high-technology said in 401K Contributions Limit Increases for 2018...But...:
Fourth, let’s go back to that 10-year budget window that Washington uses. What’s going to happen in 10-20 years from now when more retired people are drawing down Roth funds and not paying taxes? With lower tax revenue, Washington will need to raise taxes some other way. Guess what will look like a nice fat piggy bank to them at that time – yep, those Roth 401(k) plans. Someone will inevitably point out that there were investment returns that were not taxed, and I can just see what that will lead to. If you don’t think it will happen, look at Social Security – it was originally tax free, then it was taxed up to 50% (in theory the employer portion), and now I believe up to 85% is taxable for some higher earners (the 15% representing an estimate of the post-tax payroll taxes).
I wish I could give you multiple upvotes.
From comments I’ve read, most people are concerned about the immediate impact, but your 4th point above has occurred to me also. One can’t say in regards to anything the government may do, “Oh, they’ll never…”
Some media reports incorrectly leave out the fact that the $2400 limit would only apply to the pretax portion and is not a total limit.
If they do push this through before year-end, I have little doubt that it might become effective immediately at the start of next year. I believe something similar happened with the cancellation of file & suspend with Social Security last year, with only a few months notice before it became effective.
My husband’s 401k has a mix of pretax, post tax, and Roth. Most recently, he was contributing Roth. After this news broke, I recommended that he go back to pretax and max it out, instead of only contributing to get the employer match. It’s more of a protest move at this point.
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@gwraigty said in 401K Contributions Limit Increases for 2018...But...:
@skh12 said in 401K Contributions Limit Increases for 2018...But...:
this should have ZERO impact, on your personal responsibility for your own savings and planning for your future.
Agree. I’ve never understood people who say that because their company doesn’t offer a 401K, that they can’t save for retirement. IRAs and any other savings vehicle are available. It’s just that not all of them are tax-advantaged.
But that isn’t really the point here.
It’s the way people are. I’m a believer in traditional pensions, but that isn’t going to happen for almost all of us.
Using myself as an example, my first job at 18 was working at Taco Bell. No 401k there at the time. The last thing on my mind was to contribute to my own IRA from my poverty wages at the time, so I didn’t. At least with a 401k, your contribution is taken out of your pay. To withdraw money early there are penalties and paperwork. This structure is needed, otherwise many will blow this money on beer and hookers rather than save for retirement that may be decades away.
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@high-technology said in 401K Contributions Limit Increases for 2018...But...:
Sorry for ranting
If only my ranting sounded so cogent.
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The important thing is that the rich will continue to get richer, so that means it is as important as ever to either be rich or get rich. If you can’t afford to make non-deductible contributions that means you aren’t rich and you need to change that. Preferably sooner, rather than later, so you can continue to benefit from non-deductible contributions should they limit the deductible portions.
Believe me when I tell you that you will be better off financially, if you can be rich and do this.
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@david-scubadiver
please define "rich"
to call someone “rich” is pretty vague.
just because i’m financially responsible, and i have a nest egg and emergency funds, am i rich?
on the same token, if i were a financial idiot, overextended and living paycheck to paycheck, is that any less “rich”?
people shouldn’t lose sight of personal responsibility, give a dummy a winning lottery ticket and see what happens.
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"A draft tax bill will reduce the cap on 401(k) contributions but not to $2,400 as House Republicans had wanted, ABC News reports.
The bill will lower it to a point halfway between the current limit, which is $18,000 for most people, and the preferred $2,400 that lawmakers wanted."
House Republicans, White House reportedly compromise on reducing 401(k) cap
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I’m still hoping it’s a trial balloon. Otherwise, my postcards are ready. “grin”
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@skh12 said in 401K Contributions Limit Increases for 2018...But...:
@david-scubadiver
please define "rich"
to call someone “rich” is pretty vague.
just because i’m financially responsible, and i have a nest egg and emergency funds, am i rich?
on the same token, if i were a financial idiot, overextended and living paycheck to paycheck, is that any less “rich”?
people shouldn’t lose sight of personal responsibility, give a dummy a winning lottery ticket and see what happens.If you have to ask, you aren’t rich.
But, yes, if you are a financial idiot, overextended and living paycheck to paycheck, you aren’t rich.
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@david-scubadiver
I was curious what your definition was ?
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Speculation about provisions in a tax bill is not very useful IMO since we are a long way from anything being passed.
But on the topic of 401Ks, in retrospect, I would have been much better off investing in a Roth and a total stock market index fund in my taxable account. I am now 69 and looking at RMD’s in the next few years and it is going to be brutal. My marginal fed+state income tax rate plus the increases in social security/Medicare fees make my overall marginal tax rate well north of 40%.
I am not complaining (much :). I am fortunate to have started saving during the Ronaldus Magnus’ boom in the 1980’s and to have stayed the course during the crashes in the Clinton and Obama administrations but it is frustrating to see that much go to taxes.
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@skh12 To me, rich is being able take care of one’s own family, and someone else’s family, without the need to take on any debt, and without having financial constraints.
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There doesn’t appear to be any mention of changes to 401Ks/IRAs in the amended version of the House bill.
However, a link to the Senate bill amendments (of which there are 355) does mention changes to them. Specific items of interest are:
Hatch Amendment #2 to Chairman’s mark of “Tax Cuts and Jobs Act.”
Cosponsors:
Short Title: An amendment to the catch up contribution rules for section 401(k), 403(b) and 457)(b)
retirement savings plans.
Description of Amendment: This amendment would require all catch up contributions to section 401(k),
403(b) and 457(b) retirement savings plans to be Roth only, and increase the $6,000 catch up contribution
annual limit applicable to such plans to $9,000.
Offset: This amendment is expected to raise revenue in the 10-year budget window.Cantwell Amendment #3 to The Chairman’s Mark of the “Tax Cuts and Jobs Act”
Short Title: Expansion of Retirement Savings Opportunities for Americans
Co-Sponsor: Stabenow
Description of Amendment:- Increase annual pre-tax basis contribution limits for 401(k) plans to $24,000 annually
- Allow an additional tax credit for employers equal to a percentage of the employer’s
matching contribution - Employers who do not offer a retirement savings plan would automatically enroll their
workers in payroll deduction contributions to an IRA. Contributions would be set at a
default rate that would escalate after the initial year of participation. Workers would be
able to opt-out of the program and make no contributions, or to select a different savings
rate, and they will be able to choose their investments.
Offset: TBD
[NOTE – Amendment sponsor reserves the right to modify the amendment for technical, revenue
related, germaneness, or other purposes.]
Hatch Amendment #3 to Chairman’s mark of “Tax Cuts and Jobs Act.”
Cosponsors:
Short Title: An amendment to certain rules relating to Individual Retirement Accounts (IRAs).
Description of Amendment: An amendment to repeal of special rule permitting recharacterization of
Roth IRA contributions as traditional IRA contributions.
Offset: This amendment is expected to raise revenue in the 10-year budget window.Burr Amendment #4 to the Tax Cuts and Jobs Act
Short Title: 529 financial planning
Description: Under current law, a nonqualified distribution from a 529 college savings account is subject
to a 10% penalty and the distribution is treated as regular. This amendment would allow unused savings
in 529 accounts to be ‘rolled over’ into Roth IRAs. To avoid the 10% penalty, savings must be rolled over
into the Roth IRA of the 529 account owner or beneficiary, and the 529 account must have been opened
for at least 10 years. Rollovers would be treated would be subject to Roth contribution limit.
Offset: TBD
[NOTE – Amendment sponsors reserve the right to modify the amendment for technical, revenue
neutrality, or other purposes.]http://online.wsj.com/public/resources/documents/MasterTaxAmendments.pdf
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Just closing the loop here – Tax Conference report stripped out any changes to 401(k) plans, so 2018 will be indexed as outlined in the initial post and no forced Roth.
