Personal Finance

Tax bill leaves your 401(k) unchanged — for now

Key Points
  • Congress unveil a tax bill that leaves rules for 401(k) savings alone.
  • Though pretax 401(k) contribution limits have not been lowered, the U.S. still faces a retirement crisis, one expert says.
  • Savers need to calculate their retirement contributions based on their future needs, not government-imposed pretax limits.
Jamie Grill | Getty Images

It looks like 401(k) plan users got a pass on changes to the popular retirement savings program.

The proposed GOP tax plan apparently leaves current contribution limits in place, which means savers will be able to put away as much as $18,000 in their 401(k) plans in 2017. People ages 50 and over will be able to save as much as $24,000.

Those who use individual retirement accounts can put in as much as $5,500, or $6,500 for individuals 50 and over.

Trump: 401(k) plans very important to middle class
Trump: 401(k) plans very important to middle class

Though current retirement savings rules were left alone, there is still room for improvement, according to Teresa Ghilarducci, professor of economics at the New School for Social Research.

"We still have a failed retirement system," she said.

While the $18,000 limit is appropriate for most members of the middle class and above, she said, it still doesn't solve problems for many Americans, half of whom don't have access to 401(k) plans. That is because individuals may be self-employed or work for an employer who does not offer a 401(k), among other reasons.

"Congress is clearly only caring about paying for taxes for people at the top, and I really wish they were focused on the retirement crisis," Ghilarducci said.

Consequences for savers

Retirement experts worried that lowering limits on pretax contributions would steer individuals to make the wrong decisions with regard to their retirement savings.

Most Americans are already facing a shortfall when it comes to how much money they will have in retirement and how much they will need.

Households approaching retirement had just a median $135,000 saved in 401(k) and individual retirement accounts in 2016, according to research from the Center for Retirement Research at Boston College. At the same time, about half of households close to retirement had no 401(k) savings.

A move to a Roth IRA (where money is taxed upfront) could have negative behavioral consequences, said Jack VanDerhei, research director at the Employee Benefit Research Institute, an independent organization that provides research on employee benefits.

Savers who are young or who have low account balances might not be discouraged enough from taking the money out because they have already paid taxes on those balances, VanDerhei said.

Individuals who are participating in these employer-provided plans need to know that any threshold is not necessarily the recommended amount they need to save in order to retire, he said.

"It's just absolutely imperative that they figure out how much they should be contributing and keep doing that regardless of how much is tax deductible," VanDerhei said.