Capping the maximum 401(k) contributions at $2,400 would affect U.S. workers across all ages and income levels who currently contribute to retirement-savings plans, according to new research cited by the Wall Street Journal.
Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, has said that lawmakers are weighing modifications to 401(k)s as part of the tax overhaul planed under President Donald Trump, the publication writes. The $2,400 cap isn’t finalized, but the figure has been floated regularly, according to the Wall Street Journal.
If that is indeed the new cap, however, a large number of the 55 million American workers participating in 401(k) plans would lose some of the upfront tax deductions they currently enjoy, according to research from the nonpartisan Employee Benefit Research Institute cited by the publication. For example, 38% of employees who earn between $10,000 and $24,999 annually contribute more than $2,400 to their 401(k) every year, as do 32% of workers earning between $25,000 and $49,999, the Wall Street Journal writes. But that proportion rises to 60% for those earning between $50,000 and $74,999, 76% for workers earnings $75,000 to $99,999 and 87% for those earning over $100,000, the publication writes.
The cap would also affect income earners across all age groups: 43% of workers between 25 and 34 contribute more than $2,400 to their 401(k)s, as do 56% of those between 35 and 44, 62% of workers between 45 and 54 and 64% of those between 55 and 64, according to the EBRI research cited by the Wall Street Journal.
The cap reduction “would be turning a major portion of the U.S. retirement system on its head,” Shai Akabas, director of economic policy at the Bipartisan Policy Center in Washington, tells the publication. But Akabas admits that there’s still not enough evidence to determine the impact, according to the Wall Street Journal.
Meanwhile, there is contradictory evidence as to what would happen to Americans’ savings rates if a lower 401(k) cap forced savers to use a Roth retirement account instead, where contributions are taxed upfront but withdrawals of the principal and gains are not, the publication writes. A 2017 paper from Harvard and Yale economists that looked at 11 large companies that rolled out Roth options in addition to 401(k) plans concluded that introducing a Roth choice didn’t decrease the overall savings rate, according to the Wall Street Journal.
And an analysis of 25,000 401(k) plan participants who shifted to Roths in 2016, conducted by 401(k) record-keeper Alight Solutions LLC, found that the average savings rate rose from to 10.6% from 8.2% the year prior, and that two-thirds of them increased their savings, the publication writes.
Nonetheless, Rob Austin, director of research at Alight, tells the Wall Street Journal that a similar outcome isn’t necessarily likely if the shift to Roths was forced upon the savers.
