In 2017, tax reform debate included discussion of lowering the amount that workers were able to save in tax-deferred retirement plans to $2,400 from $18,500. Amounts contributed over $2,400, up to the cap, were slated to be taxed as those monies were deposited into the retirement plan with tax free distributions–when made in compliance with the tax code. Such “after-tax” deposits are often referred to as Roth savings, named after Senator William Roth, Jr. But, as a reminder, what became the Tax Cut and Jobs Act of 2017 did not lower the “pre-tax” amount.
In 2021, the new Congress may seek to implement even greater change to retirement plans than the previously entertained notion of Rothification. Several industry experts have alluded to the elimination of tax deferred savings entirely, to be replaced with a refundable tax credit of 26%. In support of this change, advocates argue that the tax deferral scheme provides the greatest benefit to the highest wage earners, who are also incidentally more likely to save in their 401k, 403b or 457 plan. Under current tax rates, the highest paid can lower their tax bill up to 37% on saved earnings, while workers with lower incomes, may only lower their taxes by 10% or 12% of the amount saved. Under the potentially new structure, assuming the Congress doesn’t apply an income cap on the tax credit, the worker earning $250,000 would recognize the same 26% tax credit, or $260 on each $1000 saved, as the worker earning $25,000, making the tax incentive equal for all income levels.
- Upcoming Changes that May Impact Retirement Savings - January 20, 2021