Here's what the GOP tax plan means for your retirement savings
- 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 "Tax 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 is passed.
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.
Keep in mind, these are just guidelines. If you're behind on saving for retirement, you can always take steps today or in the future to catch up as much as possible.