President Donald Trump on Monday dismissed the possibility of curbing a popular tax-deferred U.S. retirement savings program to help pay for his sweeping tax cuts, and voiced doubts about adding another top bracket targeting the wealthiest Americans.
President Donald Trump on Monday dismissed the possibility of curbing a popular tax-deferred U.S. retirement savings program to help pay for his sweeping tax cuts, and voiced doubts about adding another top bracket targeting the wealthiest Americans. The potential scaling back of 401(k) plans, which for four decades have helped millions of workers save for retirement, is one of several important details yet to be ironed out in a major tax overhaul that Trump promised as a candidate and wants his fellow Republicans who control Congress to pass by year’s end.
The White House and its congressional allies have floated the idea of paring certain tax deductions to make up for revenue that would be lost due to their proposed tax cuts, the centerpiece of which is a sharp reduction in the corporate income tax rate. The Wall Street Journal and the New York Times reported on Friday that Republicans were considering an annual cap of about $2,400 on pre-tax contributions to 401(k) plans, roughly 13 percent of what workers under age 50 currently can contribute on a tax-deferred basis.
That would slash the amount of money that workers can save for retirement in 401(k) plans, which typically are invested in a portfolio of mutual funds. “There will be NO change to your 401(k),” Trump wrote on Twitter. “This has always been a great and popular middle class tax break that works, and it stays!” Tampering with 401(k) plans, which have largely replaced defined benefit pensions in the United States, would risk alienating tens of millions of workers as well as Wall Street, which generates fees from managing the plans. Many companies match a percentage of their employees’ 401(k) contributions.
It also would provide ammunition to Democrats, who have painted Trump’s plan, with its $6 trillion in tax cuts, as a gift to the rich and corporate America that would balloon the federal deficit.
More than 94 million Americans are covered by defined contribution plans like a 401(k), according to a recent study by asset manager Vanguard. Total assets in such plans exceed $7 trillion.
Democrats, aware of the appeal of tax cuts to many working-class Americans including some who abandoned the party in the 2016 election, said the potential 401(k) changes represented the unraveling of the nation’s retirement savings.
“This is going to devastate American families if we don’t give people an incentive to save,” Democratic Senator Heidi Heitkamp said on CNBC. “It is absolutely the wrong direction.”
Securing congressional passage of his tax plan is critically important to Trump, who has yet to get major legislation through Congress since taking office in January, including a healthcare overhaul he also promised as a candidate last year.
The White House argues that tax cuts are needed to boost economic growth and create jobs, but has shown sensitivity in recent weeks to arguments that it is endangering America’s long-term fiscal health. Based on the outline of the plan that was unveiled last month, independent experts have concluded that corporations and the highest earners would benefit the most, and many upper middle-income people would face higher taxes.
NEW TAX BRACKET
There are signs Republicans may add a fourth income tax bracket affecting high earners to the tax blueprint, which envisions collapsing the number of brackets to three from the current seven. The idea of an additional top tax bracket was floated by Republican House of Representatives Speaker Paul Ryan. In an interview broadcast on Fox Business Network on Monday, Trump appeared to pour cold water on the idea. “It may not happen,” Trump said. “The only reason I would have (it) … is if for any reason I feel the middle class is not being properly taken care of.”
There is also pressure from investors to pass the tax overhaul. The expectation of deep tax cuts has helped propel U.S. stock markets to record highs during Trump’s first year as president. Trump is expected to participate on Tuesday in Senate Republicans’ weekly policy lunch. He said he would press the lawmakers to act on taxes and that he thinks there are enough votes to pass the plan. While its broad parameters have been made public, the detailed legislation has not yet been unveiled.
Democrats have urged Trump to include them in the development of the legislation. The Republican blueprint was devised without Democratic input. The last major tax restructuring, Republican former President Ronald Reagan’s 1986 overhaul, received significant input and support from Democrats.
The head of the most conservative bloc in the House said he would vote for the tax proposal even though it would increase the deficit in the short term. Representative Mark Meadows, chairman of the House Freedom Caucus, told CNN he hopes that “we can make some adjustments on some of those spending things to address the deficit in the coming years.”