The emphatic Monday-morning tweet sent by President Trump claiming 401(k) plans would not be impacted by the GOP tax plan created headlines across the country.

According to a story first reported in the Wall Street Journal, Congressional Republicans are considering capping pre-tax contributions on 401(k) plans at $2,400 a year. Contributions above that threshold would be invested in Roth 401(k)s, which are made on an after-tax basis and distributed tax-free in retirement.

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

While the tweet no doubt throws a wrench into Republican plans to limit existing deductions in the tax code to pay for lower corporate and individual rates, some retirement industry experts doubt the question has been put to rest for good.

No sigh of relief yet

“I wouldn’t advise a plan sponsor client to breathe a sigh of relief,” said Amy Sheridan, an attorney and partner in the tax department of Boston-based Sullivan & Worcester.

“I don’t know that retirement plans are going to be able to escape this, assuming tax reform goes forward,” she added.

President Trump’s tweet came the day after he reportedly met with House Republicans, urging them to pass a tax reform bill as quickly as possible.

This week, the House is expected to vote on a budget resolution already passed by the Senate. That resolution authorized $1.5 trillion in new deficit spending, and cleared the way for the tax plan to pass the Senate through the budget reconciliation process, which would only require a simple majority of votes.

The White House and some Congressional Republicans claim the new $1.5 trillion in deficit spending will be offset by economic growth spurred by tax cuts.

But critics of the Senate budget resolution say that it is based on exaggerated growth claims. The resolution assumes 2.6 percent in average GDP growth, considerably more than the Congressional Budget Office’s projections, which put average GDP growth at 1.8 percent over the next decade.

Even with the extra allowance on deficit spending, Congress will have to offset the revenue lost from tax cuts. The Committee for a Responsible Federal Budget, a non-partisan think tank, estimates the proposed new corporate and individual tax rates will increase the deficit by $2.2 trillion over the next decade.

A procedural rule in the Senate, known as the Byrd Rule, will require a tax bill to be deficit neutral beyond the 10-year budget window if the tax cuts are to be permanent and passed with a simple majority.

“Tax reform will have to be paid for somehow,” said Sheridan. “It’s becoming increasingly difficult to see how Congress does that without doing something unpopular to someone,” she added, referring to the existing tax deductibility of 401(k) contributions and other popular deductions in the tax code, like the deductibility of mortgage interest, charitable contributions, and state and local taxes. All told, deductions in the code account for $1.6 trillion in foregone revenue.

The so-called Rothification of retirement plans would allow Congress to bring revenue it projects to collect on traditional 401(k) plans decades down the road into the 10-year budget window.

According to the Joint Committee on Taxation, defined contribution deferrals will cost the IRS about $102 billion in deferred revenue in 2017, and about $584 billion between 2016 and 2020.

That’s a considerable pot of money to draw from, notes Sheridan.

“My view on Rothification is that it was going to be unpopular with the one group you don’t want reform to be unpopular with—the middle class,” she added.

President’s tweet ‘not going to be the end of it’

Shai Akabas, director of economic policy at the Bipartisan Policy Center, also doubts that President Trump’s tweet puts an end to the debate over the role of 401(k)s in tax reform.

“The tweet is not going to be the end of it,” Akabas told BenefitsPRO. “It seems like we are not yet at a point of final determination on the issue.”

Akabas and other economists note the distinction between the tax preferences on traditional 401(k) plans relative to other deductions in the code.

While other deductions constitute foregone revenue, 401(k) contributions are ultimately taxed when withdrawn in retirement.

“It’s very different from other tax preferences,” said Akabas. “It just changes the timing of the revenue gains for the government. The main reason this is under consideration is for revenue purposes.”

The BPC and the Urban Institute are working to release a study on the long-term impact of Rothification on the federal balance sheet. One factor the study is examining is the reality that under Roth plans, federal revenues do not benefit from years of investment gains.

BPC is expected to release its study around the time the Employee Benefits Research Institute releases new data on how Rothification would impact savings rates. Many in the retirement industry expect that mandating Roth savings would lead to middle and lower income Americans reducing their contribution levels to retirement plans because of the immediate tax exposure on Roth deferrals.

EBRI is expected to release its findings in the second week of November. House Republicans have said they expect to release the first details on their tax bill on November 1.

King for a day

The prospect of using Rothification to fund tax cuts has been met with considerable bipartisan pushback on Capitol Hill.

Democrats on the House Ways and Means Committee and the Senate Finance Committee have voiced strong resistance to Rothification in letters to the White House. Republicans have also raised concerns in Congressional hearings.

In fact, proponents of using 401(k) contributions to fund lower tax rates are hard to find outside of the tax-writing committees in Congress.

Michael Reese, CFP and president of Centennial Wealth Advisory, a Michigan-based RIA with $98.5 million in assets under management, strongly favors the Roth savings model over traditional 401(k)s.

“If I were king for a day, and I had to make a decision—do we make all retirement plans all traditional or all Roth, and I had to pick one, I would pick the Roth model without a doubt,” said Reese in an interview.

Centennial Wealth specializes in advising retirees and near retirees, and also provides tax advice.

Reese says the idea that the immediate tax savings on traditional plans outweigh the benefits of tax savings on Roth accounts in retirement is one of the biggest misconceptions in his industry.

“The only reason to use the traditional 401(k) is if it is the only option so that savers can earn the employer match,” said Reese. “But most companies have a Roth option by now.”

Distributions on traditional 401(k)s impact individuals’ modified adjusted gross income. That often creates higher tax rates on Social Security benefits in retirement, a fact that Reese says is lost on much of the advisory industry.

“There are valid arguments for the traditional approach—the only reason a lot of people are saving is because they get the immediate tax deduction,” he said. “But for most, the advantages of a Roth plan would ultimately be more attractive than the deduction today.”

But even as a strategic advocate for Roth savings plans, Reese says making compulsory requirements via tax law would have negative ramifications for savings rates.

“To force Roth savings, that would create another barrier of entry for a person that doesn’t save as much,” Reese said.

Amy Sheridan of Sullivan & Worcester agrees that savers would feel the impact of mandating Roth savings.

“Every time you add a layer of complexity to retirement planning, you run the risk of creating a disincentive for employees to save for retirement,” said Sheridan.

Moreover, employers would have to make significant investments communication programs to educate workers.

“This would be very complicated and messy,” she said.

Instant Insights /

Trump&rsquo;s tweet won&rsquo;t be final word on 401(k)s and tax plans

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