Washington – As Congress took a major step toward a massive tax overhaul on Thursday — with no help from Connecticut’s Democratic lawmakers — the future of the popular 401(k) retirement plan was in question.
Key GOP lawmakers want to raise revenues to offset some of their proposed tax cuts by limiting the maximum pre-tax amount individuals and married couples can contribute to workplace saving plans such as the 401(k).
A 401(k) allows workers to invest some of their earnings without paying taxes on the money until it is withdrawn.
Some lawmakers want to limit annual pretax contributions to $2,400 a year, a considerable reduction from the current limit of $18,000, which under current law would be increased by another $500 next year. For those over 50, the maximum amount is $24,000 a year.
“We think in tax reform we can create incentives for people to save more and save sooner,” said Rep. Kevin Brady, R-Texas, the chairman of the House Ways and Means Committee and a key player in drafting the tax plan.
President Donald Trump on Monday tweeted, “There will be NO change to your 401(k). This has always been a great and popular middle-class tax break that works, and it stays!”
But after meeting with Senate Republicans this week, Trump has seemed to back off that promise.
On Wednesday the president said the GOP could use the retirement savings changes for “negotiating purposes.”
The 401(k) was originally designed in the 1980s to be a supplement to pension plans. But over the years, companies dropped pensions, which guarantee a certain payout in retirement, and shifted to 401(k) plans, which place the responsibility of saving and investing for retirement on workers.
In 2015, 54 million Americans had 401K plans. How many of them live in Connecticut could not be determined. But Internal Revenue Service data shows that 205,300 state residents tapped into their 401(k) or Individual Retirement Accounts that year, withdrawing a total of about $4 million.
That same year, Connecticut residents received nearly $9 million from pension funds.
Most of the Connecticut households that drew from a 401(k) or IRA account in 2015 had incomes of between $10,000 and $200,000.
The Investment Company Institute (ICI), a fund trade group, said Americans kept loyal to 401(k)s throughout the recession, when the value of investments plunged, and the average balance for 30-year participants in their 60s is about $275,000.
ICI said about 65 percent of a 401 (k) plan’s assets were held in mutual funds as of the end of June 2017.
The remaining 401(k) plan assets include stock of an employer, individual stocks and bonds, guaranteed investment contracts (GICs), bank collective trusts, life insurance separate accounts, and other pooled investment products, ICI said.
House GOP leaders say they want to unveil their rewrite of the tax code, which would cut the top corporate rate from 35 to 20 percent and reduce the number of individual tax brackets from seven to four, on Nov. 1.
On Thursday, House Republicans took a major step to advance their tax code rewrite passing a budget measure by a slim margin, 216 to 212, that would allow the Senate to pass tax legislation with just 51 votes and evade a Democratic filibuster.
No Democrat in the House or Senate is expected to vote for the tax package.
Rep. Jim Himes, D-4th District, called the budget bill an example of “blatant hypocrisy.”
“When it comes to unchecked military spending, tax cuts for the wealthy or subsidies for narrow industry interests, there’s always money to be found or, more accurately, borrowed,” Himes said in a statement. “But when it’s healthcare, infrastructure investment or education and training programs, the purse strings are drawn tight. We need a combination of smart expenditure on investment and sensible tax policy that promotes growth without giving away the farm. This budget provides neither. It isn’t even close.”
The proposed tax overhaul faces headwinds from within the GOP. Twenty Republicans joined all Democrats in voting against the budget bill Thursday
Many of those “no” Republican votes came from lawmakers in states where the proposed elimination of the deductibility of state and local income taxes would hit constituents hard. Those are high-tax states that include Maryland, New York, New Jersey, Massachusetts, California — and Connecticut.
Sen. Richard Blumenthal, D-Conn., called the tax plan “a sucker punch to the middle class,” that would “blow a $1.5 trillion-plus hole in the deficit while penalizing the middle class and passing huge tax breaks on to the wealthiest 1 percent.”
“The GOP tax plan would raise taxes on about 428,000 Connecticut households next year,” Blumenthal said. “In Middlesex County, one quarter of taxpayers claim a state and local property tax deduction, saving on average about $6,185 each year.”