Retirement savings and the GOP tax plan
Fri Oct 20, 2017 1:13pm

It has been well publicized that Americans don't save enough for their retirement:
Here's how much the average American family has saved for retirement
Kathleen Elkins | @kathleen_elk | 1:40 PM ET Mon, 12 Sept 2016

Many Americans are not prepared for retirement.

In fact, "nearly half of families have no retirement account savings at all," the Economic Policy Institute (EPI) reported.

Just how much has the average American family saved up? According to the EPI, the mean retirement savings of all families is $95,776.

But that number doesn't tell the whole story. Since so many families have zero savings and since super-savers can pull up the average, the median savings, or those at the 50th percentile, may be a better gauge. The median for all families in the U.S. is just $5,000, and the median for families with some savings is $60,000.


When it comes to retirement, the rich get richer and the poor barely scrape by, the EPI reported: "Participation in retirement savings plans is highly unequal across income groups. In 2013, nearly nine in 10 families in the top income fifth had retirement account savings, compared with fewer than one in 10 families in the bottom income fifth."


Whereas the average savings of a family with members between 32 and 37 is $31,644, the median savings is less than $500. At the other end, the average savings of families close to retirement — ages 56 to 61 — is $163,557. The median is $17,000.

Clearly, we need to encourage Americans to save more in their 401k's and IRA's. Right?

In Congress, the GOP is working on their tax overhaul bill. They want to cut taxes. But how can they make up for the lost revenue?

Ah-ha! They can discourage people from putting money in their retirement accounts so it will be taxable now!

Wait --- what?
How the GOP Tax Bill Could Squeeze Your 401(k)
Talk of limiting the amount of retirement money that people can save before taxes is worrying the financial industry
By Anne Tergesen and Richard Rubin Oct. 20, 2017 7:00 a.m. ET

Proposals floating around Washington to cap the amount that Americans can contribute before taxes to 401(k) plans and individual retirement accounts are unsettling professionals in the retirement industry.

Republicans are looking for ways to generate revenue to support broad reductions in individual tax rates. One idea is to limit the amount of pretax money households can sock away for retirement saving.


Lobbyists and others in the retirement and financial services industries who have spoken to congressional staff and committee members say lawmakers are looking at proposals that would allow 401(k) participants to contribute significantly less than what is currently allowed in a traditional tax-deferred 401(k). An often mentioned amount is $2,400 a year. It isn’t clear whether that would only apply to 401(k)s or IRAs or both.

Currently, employees under age 50 can save up to $18,000 a year in a 401(k), while those 50 or older can set aside up to $24,000. In an IRA, the annual contribution limits are capped at $5,500 and $6,500 for the same age groupings. The 401(k) limits are scheduled to rise to $18,500 and $24,500 in 2018.


Congress’s goal in making the switch is to reduce a tax break that is projected to cut federal revenue by $115.3 billion this fiscal year so the money can be used to pay for lower tax rates. The switch could boost government revenue over the next decade, the period when the tax bill will likely face a $1.5 trillion cost constraint.

Lawmakers may also make changes to an underused tax credit that acts like a government match to retirement savings.

If lawmakers enact these changes, many savers will face a choice between maintaining their current savings rate or their current take-home pay.

For example, someone in the 25% income-tax bracket who puts $1,000 into a traditional 401(k) today would save $250 in taxes—for a net decline in take-home pay of $750. But if forced to use a Roth instead, that person would lose the $250 tax savings up front and take-home pay would decline by the $1000 that goes into the 401(k).

As a result, many opponents predict all but the wealthy are likely to cut their contributions—an outcome that would stand to slow the growth of the asset-management industry.

Pay for tax cuts by increasing the number of underfunded retirees in the future. What a plan!

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