Retirement Under Fire: How To React

Retirement under fire! Over the past several days, an increasingly fearful parade of news articles have warned that the Trump White House is considering severely curtailing the tax benefits of 401(k) plans as way of offsetting tax breaks.

Here’s what we know: The Trump Administration, seeking political capital in the wake of what can generously be called a “rocky start,” hopes to make tax reform the marquee “achievement” of its first 100 days. One of the key tentpoles of that reform is a reduction of the corporate tax rate from 35% to 15%. A tax cut of this magnitude must necessarily be offset with another source of income in order to keep the government solvent.

The above becomes relevant in the context of a meeting between Gary Cohn (Director of the White House Economic Council) and the Senate Banking Committee in early April. According to the Wall Street Journal, one of the potential sources of income to offset the corporate tax rate reductions is the remove the pre-tax benefits of the 401(k), in favor of shifting them to after-tax benefits. If you’re familiar with the various types of 401(k), this change would essentially make all traditional 401(k) plans into Roth 401(k)s. Participants would trade their tax savings now for tax savings in the future… and the government gets to rake in $1.5 Trillion in revenues over the next decade.

For those of us aspiring to retire (traditionally, or early), this would be bad news. Most of us expect to be in a much lower tax bracket in retirement. Saving 28-39% on taxes now is a heck of a lot more appealing than saving later if you expect to be in the 15% tax bracket after retirement. For those taking full advantage of 401(k) plans, this change could in thousands of dollars per year in lost tax breaks.

OK, that’s what we know. Now let’s discuss what we can do.

1. Take a Deep Breath

401(k) plans have long been in jeopardy. They’re a common potential target of legislators seeking a source of funding for various pet projects and programs. The calculus of this kind of move weighs the potential ire of 401(k) participants against the perceived political benefit of successfully funding tax cuts, social safety nets, and other expensive activities. Two thirds of all Americans with access to 401(k) plans don’t take advantage of them.

That may not sound like good news, but from a certain perspective, it is. Of all of the times that the 401(k) has been on the chopping block, it has never been. Floating an idea with the Senate Banking Committee is very different from writing it into legislation, selling it to the American public, and ultimately getting a bill passed– not to mention the subsequent court challenges. At present, there is no reason to worry overly much that your 401(k) is in immediate danger, as all previous administrations have ultimately decided that it is simply too poisonous a move to make.

That doesn’t mean you can’t take concrete action today, though.

2. Take Advantage of Programs Now (and Encourage Others)

Let’s take the Trump White House’s failure to repeal and replace the Affordable Care Act (so far) as an object lesson. After the election, and before the latest repeal attempt, ACA signups continued to rise. This increasingly tipped the scales in favor of retaining the law, and increased the number of people who would potentially be negatively affected were the repeal to succeed.

If you aren’t currently participating in your company’s 401(k) plan, start immediately. If you’re already participating, consider increasing your contributions while the plan still has such spectacular tax benefits. Talk to your friends, your relatives, and your HR department about the importance of your plan to your financial stability and planning. Convince everyone you can to contribute every dollar they can afford to their 401(k). In addition to encouraging people you care about to adopt excellent financial habits, you’ll also be changing the equation for the political operators. The more Americans actively participating in 401(k) plans, the greater the risk come election-time to those who threaten them.

All of the above is just window dressing to the bottom line: Participating in a 401(k) is a massive tax benefit today, so the time to use it is now.

3. Lobby Lawmakers

As mentioned above, legislators consider the 401(k) to be an appealing target because they think the revenues may outweigh the political risk. The best way to let them know about your feelings is to write them. If you have to, write an email, but it’s far better to drop a letter in the mail. Your mail may get tossed out, but someone will still have to open it and read it, and sending physical letter is a force multiplier.

Here’s what I’m writing to my representatives in both the House and the Senate. Please feel free to use it as the basis for your own letter. Please also share this article so that we can build a movement to protect our retirement savings!

Dear [Senator/Representative] [Last Name],

 

I am your constituent from [City, State]. I am writing you today regarding the troubling news that the current administration is considering raiding the tax benefits of 401(k) retirement plans to fund a reduction in the corporate tax rate. As you are no doubt aware, The United States faces a retirement crisis. Fewer and fewer Americans are able to save as much as they need for retirement. The future of our Social Security benefits are in jeopardy. What Americans need are more incentives to save, not fewer of them!

 

Just as critically, the sanctity of retirement vehicles directly affects the public’s trust in government. If the government can take away the benefits they have promised us for being responsible and saving our own money, is there any reason to trust our government’s pledges to safeguard our financial wellbeing in the future?

 

I respectfully ask that you protect the fruit of my hard work and savings from any administration or political group that would seek to attack them.

 

Regards,

 

[Your Name]

Here’s how you send your letter.  Go to the two links below and find your representative and senators.  Make note of their name, room, office building, and phone number. There are several different buildings for both Senators and Representatives.

Find Your Representative

Find Your Senator

Then, print your letters and send them to:

For Representatives:

The Honorable (Full Name)
[Room #] [Building Name] House Office Building
United States House of Representatives
Washington, D.C. 20515

For Senators:

The Honorable (Full Name)
[Room #] [Building Name] Senate Office Building
United States Senate
Washington, D.C. 20510

To increase pressure, you can also call the U.S. Capitol Switchboard at 202-224-3121, or your representative’s office directly (numbers can be found at the links above). Be polite, but very firm!

I’ve never been one to ask that people share my articles– I enjoy these topics and writing about them helps to keep my focused and saving. That said, this is the one time I will ask you to share on social media relentlessly. If this article, or one like it, goes viral, our chances of protecting our retirement savings go up drastically.

4. Use Alternate Vehicles to Fund Your Retirement

Imagine the worst comes to pass. Your 401(k) is no longer the tempting place it once was to save for retirement. The reality is that there’s always a non-zero chance of legislation changing and making retirement more difficult. There will always be other options. For my part, since I run my consulting business through an LLC, I’m already making contributions to my 401(k) as both the employer and my employee.  One potential option I would have is to increase the amount of “employer” contribution I make to my 401(k), which theoretically should still be counted as a business expense for my LLC.

There’s no telling how other vehicles like 457 plans, 403(b) plans, and HSAs will be affected in the coming days. Be open to making adjustments in your lifestyle, where possible, to shift contributions to maximize your tax savings.

5. Deep Breaths Again

Legislation is always changing. In any sufficiently complicated system (like the U.S. Tax Code), there will always be loopholes, explicit advantages, and ways for a knowledgeable citizen to work the system and benefit. If the worst should come to pass, you can count on the ingenuity of the personal finance community to come up with new tactics and methods to accelerate and optimize for retirement. One of the most powerful benefits of financial responsibility and frugality is outrageous optimism. Your hard work, savings, and– most of all– positive attitude will pull you through the current political storm.

What do you think? Would the current administration dare to raid retirement tax benefits to fund tax cuts? How realistic do you think the chances are? What else can you do between now and when the tax plan becomes clearer to protect your retirement? Let me know in the comments!

UPDATE 4/26/17 PM: White House press conference suggests that retirement contributions are hopefully off the table for now.  What income levels are most affected should major tax reform come to pass are murky, as the plan is light on details. I’ll be adopting a “wait and see” approach in the coming months. A simpler tax code is good, so long as it doesn’t disproportionately disadvantage or advantage one group.

3 thoughts on “Retirement Under Fire: How To React

  1. earlyretirementnow

    I actually like the idea. I might even write my congressman/senators to SUPPORT this. As long as they don’t force everybody to do a Roth conversion of their existing accounts and only force new contributions into the Roth 401k. Who are the people mostly benefiting from lower corporate taxes? The folks with the cushy corporate jobs, with generous corporate benefits, generous 401k plans and 401k matching and 6-figure (close to 7-figure, actually) 401k balances. I am in that group. You gain some you lose some. I am willing to scrifice the 401k for lower corporate taxes. That’s the way I see it. Better than raising gasoline taxes.That would really hurt the poor and working class.
    And of course, keep in mind that you still get the benefit of a Roth, tax-free accumulation, better flexibility during the withdrawal phase (no minimum distributions), etc.
    And it’s a hedge against tax hikes when I’m retired.

    1. The Vagabond Post author

      How do you anticipate that a lower corporate tax rate will materially affect your life for the better (assuming you are not the owner of the corporation)?

      I think the chances of this working out as a hedge against tax hikes are extraordinarily slim. Most in the FIRE crowd anticipate having a significantly lower gross income in retirement than in their working years. The future tax rate would have to be disproportionately higher to the point of political suicide to expect that 40K in annual household income in the future will be taxed at a higher rate than $150K+ in annual household income today (numbers conjured from thin air, but realistic within the FIRE crowd).

      1. earlyretirementnow

        I am most definitely a fractional owner of many different corporations: I own equities outright, through mutual funds and ETFs. With the exception of a few niche players in the FIRE crowd who rely entirely on real estate, I’d suspect that most of our FIRE comrades have very substantial wealth in U.S. corporations. You post your net worth by category and I saw that you have 6-figure investments in equities as well.

        Also, I’m completely on board with the notion of the Roth 401k being a losing proposition compared to a regular 401k. I did the comparison here:
        https://earlyretirementnow.com/2016/06/22/retirement-account-comparison/
        And it’s not even close. I am only saying that I’m willing to give up that benefit for lower personal and corporate taxes.

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