Trump tax plan leaves 401(k) savings — but high earners benefit most
Republicans decided not to limit pre-tax 401(k) savings
in the new GOP tax plan.
Retirement savings may be protected, but not enough
Americans take advantage of the tax savings.
Tax savings from Trump’s tax plan wouldn’t be huge, but
taxpayers could use the extra take-home pay to
increase retirement savings rates.
Your 401(k) is
safe. For now.
The 429-page GOP tax plan, the
Cuts and Jobs Act” revealed on Thursday, left Americans’
401(k) savings untouched.
Republicans were reportedly considering capping annual 401(k)
contributions at $2,400 on a pre-tax basis, much lower than
the current maximum contribution of $18,000 for 2017,
and $18,500 for 2018.
Many deductions could be eliminated under the detailed plan, but
retirement savings will still be deductible. Americans will still
be able to reduce their take-home pay by as much as $18,500 in
2018 by making contributions to a pre-tax 401(k) plan.
High-earners are most likely to take advantage of pre-tax
retirement savings, according to a recent report from
Vanguard. Nearly one-third of those who earn over $100,000
annually maxed out their 401(k) last year, compared to 4% of
Americans who earn between $50,000 and $75,000 a year.
Tax savings could be funneled into greater retirement savings.
Take-home pay will
likely increase modestly for many Americans if the new tax plan
Americans currently put away an average of 3.5% of their income, after taxes and
expenses, according to July data from the US Bureau of Economic
Analysis. Saving more for retirement, especially now that
401(k) tax savings will likely remain in place, could make a big
difference in future financial security.
Among those who are currently saving for retirement, older
Americans tend to put away more than younger Americans. The
Vanguard report found the following average retirement savings
rates, broken down by age:
- Under 25: 3.9%
- 25 to 34: 5.3%
- 35 to 44: 5.9%
- 45 to 54: 6.6%
- 55 to 64: 7.8%
- 65 and older: 8.3%
That’s better than nothing, but it’s still shy of the
expert-recommended 10% or 15% each month. Talk of tax reform is a
good reminder to take a close look at what you’re saving
today, and if possible, direct more money to your 401(k),
IRA, emergency fund — or all of the above.
If you need motivation to kick your goals into gear, check out
Fidelity’s recommended retirement
savings benchmarks in the chart below.
Mike Nudelman/Business Insider
Keep in mind, these are just guidelines. If you’re behind on
retirement, you can always take steps today or in the future
to catch up as much as possible.