When considering a topic as broad and politically charged as taxreform, there are two major issues to consider when gauging itsimpact on retirement: structural changes in thetax code; and the impact of tax changes on the budget deficit --who will pay for the changes when they are expected to reducerevenue?

The tax reform proposals put forth by the Trumpadministration would reduce the number of personal taxbrackets, lower the corporate tax rate to 15%, eliminate theAlternative Minimum Tax (AMT) and keep the capital gains taxbrackets on investments at current levels (20%, 15% and 0%).

On its surface, there should be relatively little impact ofthese proposals on the economics of retirement savings.

Tax deferral via defined benefit plans and 401(k) provides a superior means ofaccumulating wealth for retirement. Any changes in savings shouldbe marginal (e.g. use of traditional versus Roth 401(k)s).

Related: Dreaming of Rothification

Individuals in the highest tax bracket who see their tax rateslowered may have the benefit of tax-deferred savings slightlyreduced in the near term, although this benefit would be reversedshould tax rates increase in subsequent years.

However, there have been ideas floated by the CongressionalBudget Office (CBO) and Congress to tap retirement plans to fundshortfalls projected from reductions in tax revenue.

One recent scenario analysis by the CBO would lower the maximumallowable employee 401(k) annual contribution from $18,000 to$16,000 and would eliminate the over-50 catchup provision.

While the difference seems small, a $2,000 reduction compoundedannually over 30 years could potentially lead to a loss of nearly$133,000 in earnings for retirement. For individuals over 50 yearsof age, a total reduction of $8,000 annually could lead to a lossof nearly $173,000 in retirement earnings over a 15-year horizon(assuming a 5% annual investment return for both scenarios).

Many in the retirement industry believe that a major policyinitiative such as tax reform should be kept as separate aspossible from retirement savings policy, with the focus onincreasing the accessibility of cost efficient and flexibleretirement plans for employees and individuals. However, politicaland budget realities suggest it may not be easy.

NOTE: Information presented herein is for discussion andillustrative purposes only and is not a recommendation or an offeror solicitation to buy or sell any securities. Past performance isnot a guarantee of future results.