Tax Reform Proposals Likely to Reduce 401(k) Account Balances

Two recent proposals to change the existing tax treatment of 401(k) retirement plans, if enacted, are likely to result in lower account balances for many 401(k) participants, according to a new analysis by EBRI.

Currently, the combination of worker and employer contributions to a 401(k) plan is capped by the federal tax code at the lesser of $49,000 per year or 100 percent of a worker’s compensation (participants over age 50 can make additional “catch-up” contributions). As part of the effort to lower the federal deficit and reduce federal “tax expenditures,” two major reform proposals have surfaced that would change current tax policy toward retirement savings:

  • A plan recently presented at a Senate Finance Committee hearing that would end the existing tax deductions for 401(k) contributions and replace them with a flat-rate refundable credit that serves as a matching contribution into a retirement savings account.
  • The so-called “20/20 cap,” included by the National Commission on Fiscal Responsibility and Reform in their December 2010 report, “The Moment of Truth,” which would limit individual annual contributions to either $20,000 or 20 percent of income, the so-called “20/20 cap.”

The November 2011 EBRI Issue Brief provides detailed analysis of how both of the these proposals would be likely to affect workers’ 401(k) account.

Press release is online here.

The full report is online here.

About ebriorg
President and CEO, EBRI

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