The Impact of a Proposed Pre-Tax Contribution Cap

In recent days, there have been a number of reports about the potential for tax reform proposals incorporating “Rothification” of 401(k)s — a loss of, or reduction in, the amount of employee contributions allowed on a pre-tax basis — perhaps capped at $2,400. How many savers would that affect?

The non-partisan Employee Benefit Research Institute (EBRI), using their Retirement Security Projection Model® (based on information from millions of administrative records from 401(k) recordkeepers), found that more than half of current 401(k) contributors would be affected by a $2,400 contribution limit — based on 2015 data. And, as you might expect, the impact reaches down to some very moderate income levels. Even at the lowest wage levels ($10,000 to $25,000), nearly 4-in-10 (38%) of the 401(k) contributors would be affected by the $2,400 threshold, as would 60% of those in the $50,000-$75,000 salary range. The information was shared at the ASPPA Annual Conference at National Harbor, MD on Oct. 22.

While one might well expect that older savers (who tend to have higher incomes) would be more affected (and indeed, 64% are), but such a cap would hit 43% of workers aged 25-34.

Of course, as EBRI cautions, this information does not describe how Rothification — with or without the $2,400 threshold — would impact retirement income adequacy. But if there is any reality to the notion of imposing a $2,400 cap on pre-tax savings, one hopes that its authors would consider just how many retirement income savers — including low to moderate pay, and younger workers — would be impacted.

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