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Tax reform: taking away benefits of 401(k) retirement account?

Posted on 10/24/2017

In news over the weekend, there is said to be a provision in the Republican tax reform draft that will severely reduce the amount an individual can contribute to his or her 401(k) retirement account on a tax-free basis. The reasons behind this proposal are a bit complicated and the results are dependent on individuals' tax situations as well as the growth rate of their retirement accounts.

What it apparently boils down to is 401(k) plans put the tax benefit up front by enabling taxpayers to reduce their current tax rates. But when the funds are withdrawn, they are fully taxable at the taxpayer's then-existing tax rate. This "future" tax exemption is felt by some to be preferable because most taxpayers will be in a lower tax bracket then than they are today.

The proposal reportedly being considered by the Republican leadership in the House would limit the amount 401(k) retirement account holders can contribute on a tax-free basis. The limit is said to be $2,400. Current law allows these retirement account holders to contribute up to $18,000 if you're under 50. If you're over 50, you can make an additional catch-up contribution of as much as $6,000, for a total of up to $24,000.

President Trump tweeted Monday morning that "there will be no change in the current 401(k) rules on the tax-favored treatment of 401(k) retirement accounts."

Tax deductions for 401(k) contributions cost the Treasury about $115 billion a year.

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