A 401(k) is a defined contribution retirement account, named after the provision of the Internal Revenue Code that defers the taxation of a portion of an employee’s paycheck directed into such an account, until retirement.
This tax deferred status is limited under existing law to a pre-tax contribution of $18,000.
Employers often match employee contributions, and they receive a tax deduction for their contributions.
Millions of American workers and retirees participate in these plans.
One proposal under consideration, as the Republican tax reform plan continues to evolve, would lower the cap on pre-tax contributions to such a plan, putting it at $2,400 a year, only 13.3% of the present limit. Contributions above the $2,400 level would have to go to a Roth account, which is taxed up front.
This proposal would mean that a lot of middle class folks would pay a good deal more in taxes than they would otherwise, and (something that is politically at least as touchy) it would be introduced largely to allow Republicans to make the case that the over-all reform proposal is revenue neutral. Their plan has to raise funds from somewhere in order to get to revenue neutrality, because it will surely involve considerable tax cuts at the highest brackets, and a cut in the corporate tax.
Right Wing View
All the newsy ‘action’ on this subject is on the right-hand side of center, as the Republicans and/or Trumpians try to decide exactly what tax reform they are proposing. On Monday, October 23, President Trump tweeted that he would not support any change in the 401(k) system. He was quite emphatic (as is his habit): “This has always been a great and popular middle class tax break that works, and it stays!”
Yet for the moment the detail work on the plan is largely in the hands of Rep. Kevin Brady (R –Tx), and Sen. Orrin Hatch (R – UT). Brady chairs the Ways and Means Committee in the House, and Hatch chairs its counterpart in the Senate, the Finance Committee.
So far, neither gentleman has indicated that he believes Trump’s tweet ends the matter. On Wednesday, at a breakfast hosted by the Christian Science Monitor, Brady wouldn’t agree that the matter has been ruled out. “We are exploring a number of ideas in those areas,” he said, and there are “continuing discussions with the President.”
Likewise, Sen. Hatch said, “I’m open to looking at anything” as the full bill (supposed to be ready next week) comes together.
Left Wing View
The left has never been enthusiastic about 401ks. It has tended to see them as a poor substitute for pensions, and to think it a dirty trick by corporate forces that “defined contribution” plans have so largely replaced “defined benefits.”
Scott Deshefy, a Green Party activist, says that Americans have been duped into “squirreling away money to shoot craps in the stock market.”
In Vox, writer Dylan Matthews made the case in 2015 that 401(k)s are “failing many Americans,” and it would be better to expand Social Security so people don’t have to rely on such gimmicky accounts.
But this doesn’t mean that Matthews, or Vox, or anyone to the left of center, is going to cheer on Hatch and/or Brady if they propose limiting 401(k)s.