Republicans are considering a proposal that would radically change the way Americans save for retirement

  • Republicans are reportedly considering a cap on the amount people can put into a traditional, tax-deferred retirement account.
  • One proposal would cap the amount at $US2,400 annually and force people to use a Roth account for anything over that.
  • The plan would help pay for the GOP’s massive tax overhaul, but could depress retirement savings.

Republicans are reportedly considering a massive change as part of their tax code overhaul that could drastically alter how Americans save for retirement.

The Wall Street Journal’s Anne Tergesen and
Richard Rubin reported that GOP tax writers on the House Ways and Means Committee are considering a proposal that would cap the amount people are allowed to put into a traditional, tax-deferred 401(k) account, or IRA. If you go over that cap, you would be forced to contribute to a Roth account.

Now, people have a choice to save via a traditional or Roth account, either 401(k) or IRA. A traditional account allows money to be taken out directly from a person’s paycheck without being taxed first, but is eventually taxed when it is spent.

A Roth account, on the other hand, is taxed as it is added but not when it is used.

Many retired people have lower incomes than when they were working and are therefore in a lower tax bracket, making the traditional version attractive. (In general, there are a variety of reasons to choose one type of account over the other.)

According to the Journal, a proposal under consideration would cap the annual amount that can be placed in a traditional 401(k) at $US2,400 a year. Any contribution afterward would have to go toward a Roth account.

For 2017, the annual cap on traditional 401(k)s is $US18,000 for people under 50 and $US24,000 over 50. For an IRA, the caps are $US5,500 and $US6,500 for the respective age groups.

The new cap would not apply to existing savings already in accounts and employer contributions to a traditional 401(k) or IRA would not be subject to a cap, according to the Journal.

Such a move would increase the amount of tax revenue from retirement accounts and help pay for the massive planned tax cuts in the GOP plan. But it runs the risk of depressing the amount of money people save for retirement.

Republicans are currently deciding how to pay for their large tax cuts. Their outline for the overhaul would cost $US2.2 trillion over 10 years, but the recently passed Senate budget only allows for an additional $US1.5 trillion added to the federal deficit over 10 years.

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