Mad Money

Cramer: The 401(k) debacle proves why sweeping tax reform will be hard to pass

Key Points
  • "Mad Money" host Jim Cramer explains why limiting 401(k) contributions would harm middle class consumers.
  • President Donald Trump tweeted on Monday that "there will be NO change" to 401(k)s despite a report of potential cuts by The Wall Street Journal.
  • Cramer also goes over why noise around tax reform could hinder the GOP's efforts.
Cramer: Why sweeping tax reform will be hard to pass
Cramer: Why sweeping tax reform will be hard to pass

While the chances of lawmakers drastically cutting 401(k) contribution limits are slim, CNBC's Jim Cramer still doubled down on why the cuts would be especially harmful to the middle class.

"The whole point of a 401(k) plan is that your contributions are tax-deductible up to $18,000 a year. They want to slash that to $2,400? It's hard to imagine a less popular way to pay for the massive tax cuts that President [Donald] Trump assures us [will] make our companies more competitive while helping the middle class," the "Mad Money" host said.

"But if you neuter 401(k)s, then really, you're just punishing individuals who save in order to give corporations a tax break. Well, that's just crazy," he added.

After The Wall Street Journal reported that GOP lawmakers considered slashing 401(k) contributions as a part of tax reform, Cramer went on NBC's "TODAY" on Monday to explain why the cuts would negatively affect consumers.

Shortly thereafter, Trump tweeted that the 401(k) change would not be put in place.

"There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!" the president wrote.

Even so, Cramer said slashing the limit would throw a wrench in the more than $5 trillion that middle-class Americans have saved via 401(k)s.

"[401(k)s are] widely viewed as a bulwark against the possibility of cuts in Social Security, something that seems politically unthinkable even as the actuarial tables say it might be inevitable," Cramer said.

Moreover, financial services companies, which receive fees from 401(k) plans, would undoubtedly fight back against the limits, the "Mad Money" host said.

Cramer said the defense against cutting 401(k) contributions is fairly straightforward. Taxing savings at the rate of withdrawal encourages people to save, something that U.S. citizens were not very good at doing before Congress enacted 401(k) plans in 1978, he said.

And the ability to save pre-tax earnings and be taxed later — unlike Roth IRAs, which take after-tax contributions and generally aren't tax-deductible — is very attractive to the average citizen.

"The whole attraction of a 401(k) is you pay into it using pre-tax income, and this would wreck that whole system," Cramer said.

The "Mad Money" host even wondered if lobbyists leaked the $2,400 number on purpose in order to rally the retirement lobby and consumers close to retirement against the plan.

Changing the limit to $2,400 would hit consumers in their 50s especially hard because, as the 401(k) plan stands now, contribution limits expand to $24,000 a year when participants turn 50.

"For all of those reasons, I think this proposal to make 401(k) contributions taxable at a much lower level is dead on arrival," Cramer said. "The most important takeaway is that the guys running this process in Congress, some could say that they're clowns. They should've known this proposal would face massive resistance."

It almost seems to Cramer that there are interest groups and other forces laser-focused on making this consideration fail, let alone Trump's broader plans for tax reform.

"To me, that means the only way we're going to get tax reform is if it's much smaller than what we're currently being promised, small enough that it doesn't have to be offset by something unpopular like this," Cramer said.

"There were no denials about this potential slash by anyone in the House GOP leadership," he continued. "It's on the table for them, even if it isn't for the president. This proposal will end up being on the butcher block and it won't get done even if, by some miracle, tax reform passes, but it is a tremendous example of what's wrong with this whole process and why I remain steadfast that you focus on corporate profits, not corporate welfare, from Washington."

WATCH: Cramer pushes back against 401(k) cuts

Cramer: The 401(k) debacle proves why sweeping tax reform will be hard to pass
Cramer: The 401(k) debacle proves why sweeping tax reform will be hard to pass

Disclosure: NBC and CNBC are owned by Comcast's NBCUniversal unit.

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