Personal Finance

The 401(k) debate continues as lawmakers float a $20,000 cap

Key Points
  • Pretax 401(k) contribution limits have dominated news headlines this week as lawmakers debate whether they need to be changed with tax reform.
  • Rep. Kevin Brady, a top tax writer in the House of Representatives, indicated on Friday that lawmakers could consider raising those limits, a sharp reversal from his comment from earlier in the week.
The 401(k) debate continues as lawmakers float a $20,000 cap

Investors worried about what will happen to rules around their 401(k) savings will have to wait a bit longer for clarity.

President Donald Trump and Congress have tussled this week over what meaningful changes, if any, to these retirement plans should look like. Earlier this week, Trump maintained that rules for contributing to 401(k)s should stay the same. Currently, workers who participate in 401(k) plans can put away as much as $18,500 next year, while those who are 50 and over can contribute an additional $6,000.

Rep. Kevin Brady, a top tax writer in the House of Representatives, said cuts to how much people can contribute to 401(k)s were still on the table. Lawmakers were said to be considering bringing the pretax limit on contributions down to as low as $2,400.

But Brady weighed in again on Friday, this time indicating that he had spoken with the president twice this week about 401(k)s. In a sharp reversal, Brady indicated that lawmakers are now looking at raising contribution limits to $20,000 or more.

It couldn't be determined on Friday how permanent those considerations could be, or if lawmakers will continue to adjust limits as they wrangle to work out a tax bill, which has yet to be made public.

Financial advisors who were interviewed earlier this week maintained that lowering pretax contribution limits to 401(k)s could exacerbate the retirement crisis the country is already facing.

That comes as many Americans approaching retirement have a savings shortfall. Households ages 55 to 64 had a median $135,000 balance in 401(k) and individual retirement accounts in 2016, up from $111,000 in 2013, according to the Center for Retirement Research at Boston College. That balance would provide just $600 per month in retirement.

"If we take away incentives for people to save for retirement, that will just make things worse," said Scott Hanson, co-founder and senior partner at Hanson McClain Advisors in Sacramento, California.

Hanson suggested a better way to improve retirement savings plans would be to separate retirement savings from employers to give investors more options.

David Edwards, president and wealth advisor at Heron Wealth in New York, suggested the government open up the Thrift Savings Plan to all investors, not just federal workers.

WATCH: Lawmakers consider raising 401(k) contribution limits

Lawmakers looking at raising 401(k) contribution limits to $20K