No Changes to 401(k) Contributions in Republican Tax Plan

Republicans have unveiled their tax cut proposal, one which consolidates individual income tax brackets and leaves retirement plan contribution limits untouched.

Republicans today unveiled their $1.51 trillion tax cut plan that makes a number of changes to individual tax rates over 10 years and sharply lowers corporate taxes from 35% down to 20%. Absent from the proposed legislation are cuts to 401(k) contributions that had been floated in rumors about the proposal.

House Ways and Means Committee Chairman Kevin Brady (R-TX) is the primary author of the bill, known as the Tax Cuts and Jobs Act. “Today marks the beginning of the end of America’s broken tax code,” said Brady. He noted, however, that he intends to offer a revision to the bill before it is marked up in committee on Monday, making it a work in progress and what could be the first of several revisions as it advances through Congress.

401(k) and TSP

While it was never specifically mentioned, any reductions to the allowed amounts to 401(k) contributions presumably would have affected federal employees who contribute to the Thrift Savings Plan which is the government’s version of a 401(k) retirement savings program.

Previous debates over the tax proposal were rumored to have considered lowering the amount employees could contribute to the retirement savings programs from the 2018 annual amount of $18,500 per year to $2,400 per year, presumably in an effort to push retirement savers to Roth savings accounts in which participants contribute after tax dollars but pay no taxes upon withdrawal at retirement age. Democrats were quick to criticize the proposal when it was floated as an attack on the middle class. They had countered with a proposal to raise the 401(k) contribution limits from 2018’s $18,500 to $24,500.

Individual Tax Rates

The Republican tax proposal would consolidate the individual tax brackets from the current seven down to three along with keeping the top 39.6% bracket for high income earners. The new brackets established by the plan would be 12%, 25% and 35%.

Single filers making up to $24,000 will pay no income tax, and individuals earning up to $90,000 will be in the 12% bracket, up to $260,000 in the 25% bracket and up to $1 million in the 35% bracket. Income earners over $1 million per year would remain in the 39.6% bracket as is currently the highest bracket.

Reports have surfaced that there is a “hidden” 45.6% tax bracket in the new proposed legislation, however. Politico reported that a “bubble tax” on high income earners (individuals earning over $1 million per year) would have a 6% surcharge imposed on every dollar earned over that until it gets to about $1.2 million where the rate then goes back down to 39.6%. It is a complexity for a bill that touts that it will lead to a “simple, fair ‘postcard’ filing,” but Politico also noted that it would affect a relatively small group of taxpayers (approximately 438,000 based on 2015 data).

Estate Tax and Mortgage Interest Deduction

The plan roughly doubles the estate tax from $11 million, from $5.49 million and phases it out completely over six years. The mortgage interest deduction allows current homeowners to keep the deduction but it would be capped under the proposal at $500,000 for future home purchases.

About the Author

Ian Smith is one of the co-founders of He has over 20 years of combined experience in media and government services, having worked at two government contracting firms and an online news and web development company prior to his current role at FedSmith.