Last week, two notable retirement savings stories made the news: First, the IRS announced that it would increase the annual 401(k) contribution limit to $18,500—up $500 from this year’s limit. To reflect an increase in the cost-of-living index, new contribution limits will also apply to 403(b), most 457 plans and the federal government’s Thrift Savings Plan.
Reports also emerged over the weekend that as Congress shifts its focus from healthcare reform to tax reform in hopes of delivering broad reductions in individual tax rates, it is looking for ways to recoup lost revenue. One proposal being tossed around Capitol Hill would significantly decrease the amount that Americans can contribute before taxes to their 401(k) plans and individual retirement accounts.
The congressional Joint Committee on Taxation estimates that tax exclusions for individual retirement contributions will cost the federal government $115 billion next year.
Currently, American workers can contribute $18,000 a year annually to their 401(k); that figure rises to $24,000 for workers over 50. Those who contribute to these popular tax-deferred retirement accounts don’t pay taxes upfront on this income. Instead, they pay taxes on the money during retirement, as they begin to draw income from these accounts.
According to MarketWatch, some senators mulling the tax reform have proposed capping 401(k) contributions to $2,400 a year, but that it isn’t clear whether that would only apply to 401(k)s or IRAs or both. Annual IRA contributions currently cap out at $5,500 a year for workers under 50.
However, on Monday, President Trump tweeted, “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”
Emily Schillinger, a spokeswoman for House Ways and Means Committee Republicans, has said that “members are developing pro-growth tax reform policies that will encourage and support retirement savings for all Americans.” The committee is widely expected to release a version of the tax bill by mid-November.
For more on new IRS 2018 plan limits, including on HSAs and FSAs, visit www.irs.gov