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401(k) Contributions: MUCH Lower Limits May Be Coming in 2018
Posted By Isaac Nuriani
With the repeal and replace of Obamacare on hold for now, the Trump administration has turned its attention to tax reform. Trump is proposing substantial tax cuts that could total as much as $5 trillion.
But tax cuts are a funny thing. They usually sound like a great idea. After all, who among us doesn’t want to pay less in taxes? However, without meaningful spending cuts, Uncle Sam has to find a way to pay for those lower taxes to cover the revenue shortfall.
To accomplish that feat, politicians will often engage in a bit of shell game. For example, they may cut your tax rate over there, but limit deductions over here. And one idea they’re kicking around right now is to significantly reduce the annual 401(k) contribution limits in 2018.
As with other tax-deferred retirement plans, 401(k) plan participants can lower their taxable income in a given year by the amount of their contribution. If you make $40,000 per year, and can sock away $4,000 of that in 401(k) contributions, not only do you have $4,000 (more) dollars working for you in an investment account immune from capital gains taxes, but when it comes time for you to file your individual return for the year in which you made the contributions, your taxable income is reduced from $40,000 to $36,000. Nice.
Except now, Uncle Sam wants to change the rules so that things are not so nice.
Specifically, Republican lawmakers are giving serious consideration to lowering – by a lot – the annual limits on 401(k) contributions, as a way to help pay for tax cuts. Currently, the maximum annual limit for workers under 50 is $18,000, while the limit for workers age 50 and over is $24,000. However, some in Congress are kicking around the idea of lowering the annual 401(k) contribution limits all the way down to just $2,400. If that happens, it means those plan participants investing many thousands each year in a 401(k) and seeing those dollars come off the top of their taxable income…will have the ability to shelter only a small portion of that amount, going forward.
Consumerist.com points out that someone who works from age 25 to age 65 can presently set aside as much as $810,000 in contributions over that time period – and that’s before any growth – inside of a 401(k) account. However, if the $2,400 limit goes into effect, that $810,000 goes down to a (relatively) paltry $96,000.
As unfortunate as that much lower a limit would be, the problems that stem from it may worsen considerably if you make less-than-stellar decisions about how to allocate your resources. In other words, while no sensible person would make the case that there’s an acceptable margin of error when it comes to choosing how to invest your money, the simple truth is that the less you have, the more important it is that the decisions you make are the very best.
Will we really see such a low limit on maximum annual 401(k) contributions come to fruition? Here’s what I say: The fact that it’s being given such serious consideration – and by Republicans, of all people – should tell you that if we don’t see it happen now, it will happen in the near future. The eventual, new limit may not be as low as $2,400, but it’s likely to be considerably less than the current limits, which are seen by many in Washington as generous.
As the matter of lower 401(k) contribution limits for 2018 is being debated, you might want to consider reevaluating your holdings, anyway. As I said, you’ll have even less room to make mistakes with your investment decisions if you’re permitted to set aside many fewer dollars in your tax-deferred plan, but that doesn’t mean you should be making mistakes now. Both lower-dollar and high-dollar retirement plans should be configured to perform as best as possible through a climate of economic uncertainty. For some, that might include taking a hard look at alternative assets proven to be stores of value, such as physical gold and silver.
It’s not likely that your 401(k) allows you to invest in physical gold and silver. Assuming that’s the case, you can set up a gold or silver IRA in addition to what you have stashed in your 401(k). If you’ve left a job and have money presently “orphaned” in a company retirement plan, you have the option of completing a 401(K) to gold IRA rollover.
If you would like to learn more about how a precious metals IRA can be an excellent complement to your “traditional” investment assets and a way to protect your retirement savings, please give the team at Augusta Precious Metals a call at 855-242-4121.
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