Republicans Consider Sharp Cut in 401(k) Contribution Limits

[CheapScholar]

Now there are a few local papers circulating an AP report from an hour ago quoting an anonymous senior GOP lawmaker that the tax bill will have zero changes to 401(k) deductions when released tomorrow.

At this point we should just wait 12 hours or so and see.  But, it appears the WH is winning this battle against Kevin Brady and House leadership. 

[aspiringnomad]

Nothing really in here, but it's a pretty good summary of where things stand:

http://www.reuters.com/article/us-usa-tax-issues-factbox/factbox-trump-tax-plan-stumbles-on-local-tax-deduction-401-idUSKBN1D1681?il=0

Nobody knew that tax reform could be so complicated.

[boarder42]

They are trying to fix the income problem by shifting where the income comes from. The simple solution would be to cut spending to pay for tax cuts. Like defence.

[CheapScholar]

They are trying to fix the income problem by shifting where the income comes from. The simple solution would be to cut spending to pay for tax cuts. Like defence.

+ 1,000,000,000

[toganet]

They are trying to fix the income problem by shifting where the income comes from. The simple solution would be to cut spending to pay for tax cuts. Like defence.

Yes, I wish we could have a discussion about defense spending, but it's become a sacred cow for both parties.  A big reason for that is that much (if not most) of the tax dollars spent on defense can be better understood as money paid to private corporations to provide goods and services.  The corporations provide jobs across the country, which means a) congress doesn't want to cut jobs in their home district and risk re-election, and b) it's redistribution of tax dollars to companies who donate a lot of money to the candidates who can ensure their continued gravy train.

Add to that that things like bombs are very expensive, one-time-use items, and you've got a pretty nice business model.

[sherr]

There's no gaming involved. Mathematically if you use a traditional pre-tax account or a roth account, you will come out with the same amount of money either way, as long as the tax rate is identical from the time you contribute to the time you withdraw. Tax savings from pre-tax accounts are reinvested in the above scenario.

This is not even close to true. Mathematically they're the same if your *marginal* tax rate now is equal to your *average* tax rate in retirement.

A quick back-of-the-envelope calculation assuming you're married, in the 25% tax bracket, and today's tax rates (which means all numbers are expected to adjust with inflation, so the answer is in also in inflation-adjusted dollars) tells me you'd have to withdraw about $260,000 / year from your Traditional 401k / IRA in retirement before your average tax rate would be 25%.

If you're like most Americans / especially people on the forum and you're looking at around $40,000 instead, then your average tax rate in retirement would be 9% with Traditional accounts. That is an enormous difference from 25%, so no they are not "the same". Cutting Traditional contributions in favour of Roth is indeed a huge additional tax on the middle / upper middle class.

[boarder42]

They are trying to fix the income problem by shifting where the income comes from. The simple solution would be to cut spending to pay for tax cuts. Like defence.

Yes, I wish we could have a discussion about defense spending, but it's become a sacred cow for both parties.  A big reason for that is that much (if not most) of the tax dollars spent on defense can be better understood as money paid to private corporations to provide goods and services.  The corporations provide jobs across the country, which means a) congress doesn't want to cut jobs in their home district and risk re-election, and b) it's redistribution of tax dollars to companies who donate a lot of money to the candidates who can ensure their continued gravy train.

Add to that that things like bombs are very expensive, one-time-use items, and you've got a pretty nice business model.

yeah b/c america has a jobs problem not a spending problem.

Man lets think about that for a minute.  the government has a spending problem
the citizens have a spending problem. which makes a need for more jobs to exist.

and here we are on a forum that discusses mindful spending.  This cult needs to grow and get our fingers into the government.

[ZiziPB]

Latest and greatest: https://www.bloomberg.com/news/articles/2017-11-02/here-are-the-house-gop-s-tax-bill-talking-points

SALT preserved up to $10K
No changes to 401k
AMT eliminated completely

[Helvegen]

There's no gaming involved. Mathematically if you use a traditional pre-tax account or a roth account, you will come out with the same amount of money either way, as long as the tax rate is identical from the time you contribute to the time you withdraw. Tax savings from pre-tax accounts are reinvested in the above scenario.

This is not even close to true. Mathematically they're the same if your *marginal* tax rate now is equal to your *average* tax rate in retirement.

A quick back-of-the-envelope calculation assuming you're married, in the 25% tax bracket, and today's tax rates (which means all numbers are expected to adjust with inflation, so the answer is in also in inflation-adjusted dollars) tells me you'd have to withdraw about $260,000 / year from your Traditional 401k / IRA in retirement before your average tax rate would be 25%.

If you're like most Americans / especially people on the forum and you're looking at around $40,000 instead, then your average tax rate in retirement would be 9% with Traditional accounts. That is an enormous difference from 25%, so no they are not "the same". Cutting Traditional contributions in favour of Roth is indeed a huge additional tax on the middle / upper middle class.

I thought the author was more referring to the super rich plugging their retirement accounts with severely undervalued stocks and other assets, then letting them blow up to their 'true' value inside the account. If you have a roth account, it becomes very apparent why the rich would want to game the system (more) this way and actually want more roth space to play with.

[DavidAnnArbor]

Latest and greatest: https://www.bloomberg.com/news/articles/2017-11-02/here-are-the-house-gop-s-tax-bill-talking-points

SALT preserved up to $10K
No changes to 401k
AMT eliminated completely

How could this be revenue neutral and not blow up the deficit bigly ?

[sherr]

There's no gaming involved. Mathematically if you use a traditional pre-tax account or a roth account, you will come out with the same amount of money either way, as long as the tax rate is identical from the time you contribute to the time you withdraw. Tax savings from pre-tax accounts are reinvested in the above scenario.

This is not even close to true. Mathematically they're the same if your *marginal* tax rate now is equal to your *average* tax rate in retirement.

A quick back-of-the-envelope calculation assuming you're married, in the 25% tax bracket, and today's tax rates (which means all numbers are expected to adjust with inflation, so the answer is in also in inflation-adjusted dollars) tells me you'd have to withdraw about $260,000 / year from your Traditional 401k / IRA in retirement before your average tax rate would be 25%.

If you're like most Americans / especially people on the forum and you're looking at around $40,000 instead, then your average tax rate in retirement would be 9% with Traditional accounts. That is an enormous difference from 25%, so no they are not "the same". Cutting Traditional contributions in favour of Roth is indeed a huge additional tax on the middle / upper middle class.

Whoops, silly ol' me was using the single tax bracket numbers. The real numbers for married-filing-jointly are:
Break-even at 25%: $360,000 /year retirement spending
Average tax rate at $40,000 spending: 8%

[dandarc]

Latest and greatest: https://www.bloomberg.com/news/articles/2017-11-02/here-are-the-house-gop-s-tax-bill-talking-points

SALT preserved up to $10K
No changes to 401k
AMT eliminated completely

How could this be revenue neutral and not blow up the deficit bigly ?

Probably isn't, but if I've read some things correctly, all they have to do is fudge the numbers enough to show it is less than $1.5 trillion to the bad over the next 10 years and get enough democrats on board in the senate to wave a rule there.  That or just live with the mandatory spending cuts in a lot of programs that will kick in if they don't wave the senate rule.  So much of government budgeting is complete bullshit, I think they'll be able to show whatever needs to be shown on the "revenue neutral" front.  If they can muster the votes to actually pass it, which I don't think is a certainty.

[thenextguy]

Latest and greatest: https://www.bloomberg.com/news/articles/2017-11-02/here-are-the-house-gop-s-tax-bill-talking-points

SALT preserved up to $10K
No changes to 401k
AMT eliminated completely

How could this be revenue neutral and not blow up the deficit bigly ?

Haha...revenue neutral? Hilarious. Yes, it will blow up the deficit.

[I'm a red panda]

Latest and greatest: https://www.bloomberg.com/news/articles/2017-11-02/here-are-the-house-gop-s-tax-bill-talking-points

SALT preserved up to $10K
No changes to 401k
AMT eliminated completely

How could this be revenue neutral and not blow up the deficit bigly ?

My guess is it won't be revenue neutral.


But it does seem like there are plans to tax offshore earnings higher (which surprises me. That isn't very business friendly.)
They also seem to be working to prevent people from using the pass through rate for their personal taxes.

[2Birds1Stone]

Happy they aren't touching 401k!

[boarder42]

You see those child tax credits - an extra 600 per kid plus 300 per parent ... this all looks to be great for mustachians so far.

[I'm a red panda]

You see those child tax credits - an extra 600 per kid plus 300 per parent ... this all looks to be great for mustachians so far.

I'd say this looks to be great for billionaires.  Still remains to be seen how great it is for most mustachians (who are a pretty wide range of income, though I think skew high "normal" income levels).

[boarder42]

You see those child tax credits - an extra 600 per kid plus 300 per parent ... this all looks to be great for mustachians so far.

I'd say this looks to be great for billionaires.  Still remains to be seen how great it is for most mustachians (who are a pretty wide range of income, though I think skew high "normal" income levels).

its a tax credit when you FIRE this should help eliminate all federal taxes depending on your spending level.  and will allow for more tax gain harvesting.

[frugalecon]

Based on the text (Section 1501), looks like the plan eliminates back door Roths. Oh well...

[TexasRunner]

I'm personally glad they are slashing the mortgage deduction.

Its still 500K.  No reason in my opinion to subsidize an excessive lifestyle.

[ixtap]

Based on the text (Section 1501), looks like the plan eliminates back door Roths. Oh well...

Well, it makes sense. Does it also apply to mega back door Roths?

[frugalecon]

Based on the text (Section 1501), looks like the plan eliminates back door Roths. Oh well...

Well, it makes sense. Does it also apply to mega back door Roths?

I may have spoken too soon..I was inferring from a description...need to find the text of the actual bill. Sorry if alarm is unwarranted.

Here is the text of the summary document:

Provision: Under the provision, the rule allowing recharacterization of IRA contributions and conversions would be repealed. The provision would be effective for tax years beginning after 2017.

Looking at it again, I think I was hasty with my conclusion,

[boarder42]

Running tally of what i've found thats relevant to this group

25% bracket starts at 90k/45k

standard deduction now 24/12

Child tax credit 1600 up from 1000 plus 300 credit per parent

Mortgage deduction up to 500k purchase price

SAL Property tax Capped at 10k deduction

havent found anything on SAL income Tax

Still cant find anything on personal exemptions i assume they were eliminated

[frugalecon]

Running tally of what i've found thats relevant to this group

25% bracket starts at 90k/45k

standard deduction now 24/12

Child tax credit 1600 up from 1000

Mortgage deduction up to 500k purchase price

SAL Property tax Capped at 10k deduction

havent found anything on SAL income Tax

Still cant find anything on personal exemptions i assume they were eliminated

Deductibility of alimony is eliminated, which may apply to some. Personal exemptions are eliminated.

[sol]

Running tally of what i've found thats relevant to this group

25% bracket starts at 90k/45k

standard deduction now 24/12

Child tax credit 1600 up from 1000 plus 300 credit per parent

Mortgage deduction up to 500k purchase price

SAL Property tax Capped at 10k deduction

havent found anything on SAL income Tax

Still cant find anything on personal exemptions i assume they were eliminated

Keep up the good work, boarder.

[starguru]

What does the mortgage interest rule mean?  Does it mean if the value of the home is more than 500k, or the value of the mortgage is more than 500k?  Is 500k a hard cut in that you get the break if your mortgage is 499k and if it is $1 more you get no break?  Or is it somehow prorated?

[sokoloff]

I'm personally glad they are slashing the mortgage deduction.

Its still 500K.  No reason in my opinion to subsidize an excessive lifestyle.

Whether or not a fixed mortgage value is "excessive lifestyle" or not depends very much on the local cost of living, IMO. The median single-family house sales price in my town hit $1.675MM last year.

[doggyfizzle]

You see those child tax credits - an extra 600 per kid plus 300 per parent ... this all looks to be great for mustachians so far.

Do you know if the GOP proposed changing the AGI phase-out limits for the child tax credits or do they stay the same under this plan?  I've been looking all morning and can't find anything on this yet.

[boarder42]

single parents get 2/3rds of the 24k MFJ get.

[boarder42]

You see those child tax credits - an extra 600 per kid plus 300 per parent ... this all looks to be great for mustachians so far.

Do you know if the GOP proposed changing the AGI phase-out limits for the child tax credits or do they stay the same under this plan?  I've been looking all morning and can't find anything on this yet.

havent found anything on that yet.

[dandarc]

https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section.pdf

This isn't the full text, but a summary by section of the full proposed bill.

[shawndoggy]

for those of us in states with NO state and local income tax, but relatively high property tax, this is a boon, right?  I lose a deduction I never had, and I gain a new deduction worth 10k?

[boarder42]

for those of us in states with NO state and local income tax, but relatively high property tax, this is a boon, right?  I lose a deduction I never had, and I gain a new deduction worth 10k?

You already had a deduction on your property taxes now its capped

[ixtap]

for those of us in states with NO state and local income tax, but relatively high property tax, this is a boon, right?  I lose a deduction I never had, and I gain a new deduction worth 10k?

Why weren't you deducting your property tax before?

[boarder42]

The tax credit phase out for children now stars at 230k for MFJ half that for single.

[shawndoggy]

Why weren't you deducting your property tax before?

LOL I'm sure I do.  not as geeked out on this as you guys!  Thanks for reminding me how little I know. (usually I have to rely on my wife for that)

[dandarc]

Repealing recharacterizations is kind of a big deal.  Seems to be specifically targeting the Roth IRA horse race.

http://www.madfientist.com/roth-ira-horse-race/

Not sure the juice is worth the squeeze on that one - the summary linked above seems to indicate they're repealing recharacterizations for both contributions and conversions.

[shawndoggy]

but to restate... so long as my property taxes are $10k or less, and I already don't pay SAL income tax, this doesn't hurt me, right?

[boarder42]

child tax credits begin in 2018

I havent found anything retroactive yet but just saw that piece of info.  PRetty sure everything is 2018 - they reduced the inservice withdrawal age to 59.5 from 62

[boarder42]

but to restate... so long as my property taxes are $10k or less, and I already don't pay SAL income tax, this doesn't hurt me, right?

depends this is an itemization thing so this is a difficult question to answer - they doubled the standard deduction to 24.4k and got rid of the personal exemptions.  Last year i had 28k in itemized deductions and got 8k in personal exemptions.  if they had left deducitons alone when i had 2 kids i would have come out far better with the old deduction/personal exemption stand point.

[doggyfizzle]

The tax credit phase out for children now stars at 230k for MFJ half that for single.

Thank you!

[dandarc]

Repealing recharacterizations is kind of a big deal.  Seems to be specifically targeting the Roth IRA horse race.

http://www.madfientist.com/roth-ira-horse-race/

Not sure the juice is worth the squeeze on that one - the summary linked above seems to indicate they're repealing recharacterizations for both contributions and conversions.

Effective for tax year 2017 - woof.  Hope no one has made a mistake on the Roth / Traditional designation.  #Can't read

[ixtap]

Repealing recharacterizations is kind of a big deal.  Seems to be specifically targeting the Roth IRA horse race.

http://www.madfientist.com/roth-ira-horse-race/

Not sure the juice is worth the squeeze on that one - the summary linked above seems to indicate they're repealing recharacterizations for both contributions and conversions.

Effective for tax year 2017 - woof.  Hope no one has made a mistake on the Roth / Traditional designation.

What about people who are on the borderline? We don't contribute until we do our taxes because SO freaked out about the recharacterization the year before we were married.

[dandarc]

Repealing recharacterizations is kind of a big deal.  Seems to be specifically targeting the Roth IRA horse race.

http://www.madfientist.com/roth-ira-horse-race/

Not sure the juice is worth the squeeze on that one - the summary linked above seems to indicate they're repealing recharacterizations for both contributions and conversions.

Effective for tax year 2017 - woof.  Hope no one has made a mistake on the Roth / Traditional designation.

What about people who are on the borderline? We don't contribute until we do our taxes because SO freaked out about the recharacterization the year before we were married.

Strike that - says "effective for tax years after 2017".  So if this passes, probably everyone should do what you're doing - wait until you know for sure to make the contributions.

[boarder42]

Repealing recharacterizations is kind of a big deal.  Seems to be specifically targeting the Roth IRA horse race.

http://www.madfientist.com/roth-ira-horse-race/

Not sure the juice is worth the squeeze on that one - the summary linked above seems to indicate they're repealing recharacterizations for both contributions and conversions.

Effective for tax year 2017 - woof.  Hope no one has made a mistake on the Roth / Traditional designation.

nothing is effective this year its after Dec. 31 2017

[CheapScholar]

Can't believe they're proposing a standard deduction of $24,000 (married) and keeping the 401(k) pretax deduction where it is.

I think this is a real win for frugal upper middle class people like me.

[dandarc]

Repealing recharacterizations is kind of a big deal.  Seems to be specifically targeting the Roth IRA horse race.

http://www.madfientist.com/roth-ira-horse-race/

Not sure the juice is worth the squeeze on that one - the summary linked above seems to indicate they're repealing recharacterizations for both contributions and conversions.

Effective for tax year 2017 - woof.  Hope no one has made a mistake on the Roth / Traditional designation.

nothing is effective this year its after Dec. 31 2017

Yeah - re-read that and corrected myself in the immediately prior post to this one.

Anyway - suppose if you find yourself in the situation of having made a contribution that you would have recharacterized, you could still withdraw the contribution up to your tax filing deadline, along with any earnings, paying tax and penalties on the earnings.  Then make the contribution to the other one.  Probably best to just wait until you're fairly sure on income for future years though.

[therethere]

Can't believe they're proposing a standard deduction of $24,000 (married) and keeping the 401(k) pretax deduction where it is.

I think this is a real win for frugal upper middle class people like me.

To be fair, they are eliminating exemptions. So really its only a difference of 2700 off your taxable income. Not huge in my opinion.

[ZiziPB]

Has anyone seen anything on capital gains taxation?  Should we assume that they are taxed at 0 up to the top of the new 12% bracket?

[Livewell]

Has anyone seen anything on capital gains taxation?  Should we assume that they are taxed at 0 up to the top of the new 12% bracket?

I was just looking for the same, found no detail yet

I think that’s a safe assumption, up to $90K, although I am hoping it would get bumped up to the second bracket.

Overall this is a bad plan for our family as we live in a high tax state (CA), at least pre FIRE.