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Tax reform: Lawmakers consider changing the 401(k) rules

Posted by on Sep. 3, 2017 at 6:20 PM
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As the current administration seeks to "reform" the tax code, 401K plans may lose their tax-deffered status. At present, money put into your 401K (or a traditional IRA) is not taxed in the year you earn it, nor is any company match.  This means you pay less in taxes that year and more money is at work toward your retirement goal.  

Under the proposed changes, 401K accounts will be taxed as income - meaning less incentive to save and less money building in the accounts for future retirement.  Right now, if you save $100 in your 401K the entire $100 gets invested as opposed to the $75 - $85 dollars you would have if you paid taxes on it first. Plus, the entire $100 invested is deducted from your taxable income, meaning you pay less in taxes as well.  This boosts the value of the accounts and helps people create a stable retirement income.


Tax reform: Lawmakers consider changing the 401(k) rules

One "idea quietly being discussed,"  is to tax the money employees designate for their 401(k) plans up front.

Currently, any money placed in a 401(k) plan is tax-deferred. Taxes are paid upon withdrawal, which starts at age 70½ at the latest.

A change to the rules would go against statements previously made by the White House, which assured reporters following the initial announcement of Trump's proposed plan that, despite some confusion, reforms would not affect 401(k) contributions.

The idea of taxing 401(k) contributions differently already has detractors, including "budget hawks, who consider it a gimmick; the financial services industry that handles retirement savings; and nonprofits that try to encourage Americans to save," says Politico.

https://www.usatoday.com/story/money/personalfinance/retirement/2017/09/03/tax-reform-lawmakers-consider-changing-401-k-rules/620734001/

Should the rules change, it would affect your 401(k) in two major ways: The amount you owe in taxes and when you would have to pay.

Americans' retirement savings are already dangerously low. According to a 2016 reportfrom the Economic Policy Institute (EPI), the median working-age family (50th percentile) had only $5,000 saved in 2013. In contrast, the top one percent of families had $1.08 million or more stashed away in 2013, or 216 times more.

by on Sep. 3, 2017 at 6:20 PM
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