White House considers taxing 401(k) contributions up front, whic - WKOW 27: Madison, WI Breaking News, Weather and Sports

White House considers taxing 401(k) contributions up front, which could reduce savings

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MADISON (WKOW) -- White House officials are considering taxing 401k retirement contributions up front, in order to replace revenue that would be lost by lowering the corporate tax rate.

Politico.com reported the news Wednesday in a story about the Trump administration's discussions about what to include in a tax reform package.

The proposal is leading area financial advisors to question how that might impact retirement savings going forward.

"One of the main reasons why 401(k)'s were set up and there were pre-tax options, or allowing you to save on the front end, is that it gives people a lot of incentive to put money away," said Sarah McGinniss, a financial advisor with Savant Capital Management of Madison.

Empowered Financial Management President Pete Cymbalak said many of his clients are everyday people who save what they can each month.

"They were a janitor, they were a secretary, and...they lived frugally," said Cymbalak. "And they put away $1 million over time," said Cymbalak.

Both financial advisors say discouraging that kind of saving is the biggest risk with taxing 401k contributions up front.

"That's probably gonna rub people the wrong way for awhile," said Cymbalak. "I think that probably lower-income earners, they're gonna have to face the fact that they may end up paying tax up front on money that they're not gonna have access to for a long period of time."

"The vast majority of people aren't saving enough for retirement already," added McGinniss,

Some people are also paying taxes at higher rate now than they will in retirement.  

"If you're in retirement and you live kind of a modest lifestyle, you may only be in the 15 percent tax bracket. So, you'd pay less tax as it comes out," said McGinniss.

The average American who invests in a 401(k) earns an income of roughly  $46,000, which puts them in the 25 percent tax bracket.

Cymbalak said he doubts many people will be impacted in that respect, saying most people choose to maintain the same standard of living in retirement and pay the same or more in taxes.

He also points out that at age 70.5, the federal government requires people to start withdrawing money from their 401(k).

Cymbalak believes that if people can absorb the tax hit in their working years, the potential change could benefit them in the long run.

"If this is played out right, you actually can put yourself in a position, with the right strategies, to make it be a benefit to you rather than harm," said Cymbalak.

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