Slashing 401(k) limits to fund budget is like 'robbing Peter to pay Paul'

401(K)s may see severe changes under tax overhaul

The GOP is at odds over 401(K) changes in the tax overhaul. The president promised the program wouldn’t be touched but other members on Capitol Hill aren’t so sure. Yahoo Finance’s Alexis Christoforous and Myles Udland explain what may actually happen.

The Trump administration and Congress have been mulling a reduction in the 401(k) tax-free contribution limits as they work on a tax plan. Currently, the employer-based plans allow most employees to put away up to $18,000, deferring taxes until a withdrawal is made upon retirement.

The 401(k) may be changed because the Trump administration is looking for ways to drum up revenue to pay for its tax reform plan, which includes significant cuts, while not adding to the national debt, an issue dear to many conservatives.

The tax-free nature of a 401(k) is set to cost the government $583 billion in lost revenue between 2016 and 2020. A significant cut to the program would bridge most of that gap.

However, it’s not that simple. The 401(k) simply defers taxes, it doesn’t exempt them. According to the Tax Foundation, a nonpartisan think tank, this half-trillion figure “does not represent taxes that will never be paid. Instead, it represents taxes that will be paid at a future time, when individuals retire.”

“The revenue will have to be found in the future,” Olivia Mitchell, a professor at the Wharton School and executive director of the Pension Research Council, told Yahoo Finance. “It’s robbing Peter to pay Paul.”

House Ways and Means Chairman Rep. Kevin Brady, R-Texas is the GOP’s chief tax writer in the House. ( AP Photo/Jose Luis Magana)

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