By Anne Tergesen and Richard Rubin
Proposals floating around Washington to cap the amount that
Americans can contribute before taxes to 401(k) plans and
individual retirement accounts are unsettling professionals in the
retirement industry.
Republicans are looking for ways to generate revenue to support
broad reductions in individual tax rates. One idea is to limit the
amount of pretax money households can sock away for retirement
saving. Such a move would likely generate significant political
blowback but it hasn't been explicitly ruled out, stirring worry
among industry lobbyists.
Members of the House Ways and Means Committee are widely
expected to release a version of the tax bill by mid-November.
Specifics on a wide range of issues remain unclear. Emily
Schillinger, a spokeswoman for the Ways and Means Committee,
declined to comment.
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.
Currently, employees under age 50 can save up to $18,000 a year
in a 401(k), while those 50 or older can set aside up to $24,000.
In an IRA, the annual contribution limits are capped at $5,500 and
$6,500 for the same age groupings. The 401(k) limits are scheduled
to rise to $18,500 and $24,500 in 2018.
There are two basic types of retirement accounts. With a
traditional 401(k) or IRA, account holders generally get to
subtract their contributions from their income. But they must pay
ordinary income taxes on the money when they withdraw it, typically
in retirement when many people are in a lower tax bracket.
With the second variety, called a Roth 401(k) or Roth IRA, there
is no upfront tax deduction but the money grows tax-free.
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.
Congress's goal in making the switch is to reduce a tax break
that is projected to cut federal revenue by $115.3 billion this
fiscal year so the money can be used to pay for lower tax rates.
The switch could boost government revenue over the next decade, the
period when the tax bill will likely face a $1.5 trillion cost
constraint.
Shifting to Roth-style accounts would move tax revenue from the
future to the near term. That would help Republicans meet budgetary
targets now but could cause problems with a requirement that
prevents the tax bill from expanding long-run deficits if they want
to pass a bill without Democratic votes under a fast-track
process.
With the aim of targeting retirement tax incentives more
directly at the middle class, lawmakers may also make changes to an
underused tax credit that acts like a government match to
retirement savings.
If lawmakers enact these changes, many savers will face a choice
between maintaining their current savings rate or their current
take-home pay.
For example, someone in the 25% income-tax bracket who puts
$1,000 into a traditional 401(k) today would save $250 in taxes --
for a net decline in take-home pay of $750. But if forced to use a
Roth instead, that person would lose the $250 tax savings up front
and take-home pay would decline by the $1000 that goes into the
401(k).
As a result, many opponents predict all but the wealthy are
likely to cut their contributions -- an outcome that would stand to
slow the growth of the asset-management industry.
When the White House unveiled the outline of its tax overhaul
plan in April, officials promised to preserve existing tax breaks
for retirement plans. A more detailed plan released by the White
House and congressional leaders in September pledged to retain "tax
benefits that encourage work, higher education and retirement
security" but left open the possibility of changes to "simplify
these benefits to improve their efficiency and effectiveness."
Sen. Rob Portman (R., Ohio) said he was "skeptical" about the
idea of lower pretax deferrals for retirement savings.
Mr. Portman said Thursday that he didn't want to make the
decision just for revenue reasons.
"I'm deeply concerned about it," he said. "I don't think you
want to disincentivize retirement savings in any way right
now."
Americans have saved about $7.5 trillion in 401(k)-type
accounts, plus $8.4 trillion in individual retirement accounts,
according to the Investment Company Institute, a trade group for
mutual funds. But some researchers say a significant percentage of
Americans haven't saved enough to maintain their standard of living
in retirement.
Industry groups have an incentive to keep the status quo and are
scrambling to preserve the tax benefits of the current system.
Earlier this year, AARP joined with groups representing employers
and asset managers -- including Fidelity Investments, T. Rowe Price
Group, Inc. and TIAA -- to form Save Our Savings Coalition to lobby
for the existing tax treatment of retirement plans.
"Asset managers tend to not like the Roth approach," says Shai
Akabas, director of economic policy at the Bipartisan Policy Center
in Washington, which is studying the potential impact on savings
rates of a Roth switch. Because taxes are taken out at the
beginning, he said, assets in retirement accounts -- and the fees
these companies collect on them -- are likely to be lower.
Dave Gray, a senior vice president at Fidelity, said a $2,400
limit would give the company a "significant concern" and would
essentially require trade-offs between the certainty of the
immediate deduction and the prospect of tax-free retirement
income.
Mr. Gray, speaking Friday at the U.S. Chamber of Commerce in
Washington, said that implementing such a system would be
"extremely difficult" and could take the industry 12 to 24 months
to implement.
Write to Anne Tergesen at anne.tergesen@wsj.com and Richard
Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
October 20, 2017 13:33 ET (17:33 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.