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Tax Reform and Your 401(k)

Washington Monument

The initial tax plan has finally been released this morning. As with anything that affects so many people there has been enormous speculation concerning what the tax plan will and won’t include, who will be hurt and who will benefit. Part of the rumor mill has included the idea that pre-tax 401(k) contributions by 401(k) participants will be limited to $2,400/year. In effect, the deduction would have made 401(k) contributions a “Roth” contribution – meaning you would pay taxes now and not pay taxes later upon withdrawal and use of your funds.

With this morning’s release, a document accompanying the Tax Cuts and Jobs Act stated that “Americans will be able to continue making both traditional, pre-tax contributions and ‘Roth’ contributions in the way that works best for them.” In other words, no changes to the two different methods for saving into your 401(k) plan – both pre-tax and Roth are available to use to contribute into your 401(k) plan up to the limits of $18,000 per year – an additional $6,000 catch up is also available for people 50 or older.

This is the first step in what will likely be a process that will see multiple proposed changes to what the final document will look like. We are far from the finish line on this tax reform and the real fights are just beginning. Know this is a process that is very fluid right now and much will still be said as “absolute” only to disintegrate the next moment. We will keep you informed as we move along with to the conclusion of this proposed tax reform.

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