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Will Extending Tax Cuts Cost Retirement Savers?
by Christopher Carosa, January 28, 2025
Congress is working on extending the tax cuts that are scheduled to sunset in 2026. Many feel this will be part of a larger bill and possibly include important retirement-related changes. There is some concern that, to offset extended tax cuts, Congress may cut back on retirement plan contribution limits.
“With respect to pending legislation, there is some concern that one way of paying for an extension of the 2017 Tax Cut and Jobs Act would be a modification of the contribution rules for 401k plans, such as reducing the maximum amounts that can be deferred or received, or requiring that elective deferrals be made on a Roth basis,” Marcia Wagner, founder of The Wagner Law Group in Boston, Massachusetts.
There are many who feel cutting retirement plan contribution limits is the worst possible offset to maintaining existing tax rates.
“It would be a horrible idea to cut back on retirement plan contribution limits for two reasons,” says Christine Mueller Coley, wealth advisor at SteelPeak Wealth Management in Woodland Hills, California. “First, and to be blunt, most people would hate this because it makes it harder for them to save and any policy like this just feels wrong, especially with recent changes in SECURE 2.0 for 2025 that increased some limits. Second, this is horrible for public and economic policy. We are already worried about the solvency of Social Security in the future, Medicare costs are always rising, as is the cost of healthcare. Inflation is still an issue (it’s slowing, but prices aren’t projected to go backward any time soon); these are all headwinds for retirement planning, so if people can’t save more for retirement while prices are going up and Social Security might be gone, then what happens? More people are reliant on government programs to survive; for instance, they cannot afford long-term care and end up in a Medicaid-funded nursing home. Policies like that can hurt the overall economy in the long run. I’m not a government tax strategist, but cutting back on retirement savings limits is a horrific idea; it’s like cutting back on public education: it’s morally corrupt, but it’s also not helping the greater good for us all in the long run.”
Still, those who advocate for reducing contribution limits don’t see it as a problem because it will only impact wealthier workers.
“Many tax cuts under the 2017 Tax Cuts and Jobs Act are set to expire in 2025 unless Congress agrees on a way to pay for extensions,” Michelle Capezza, Of Counsel for Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “An avenue that is often tapped to find pay-fors that can enable extensions of other tax breaks relates to changes to retirement savings tax incentives. Many policymakers argue that while there are trillions of dollars invested in retirement savings in the U.S., these are mainly assets of high income workers given that low income workers have less money to save and often do not have sufficient access to retirement savings vehicles. This leads to the debate around balancing incentives to save for retirement which only benefit certain workers, and reducing them to increase current tax revenue, including reducing contribution limits for high earners, or requiring more Roth-type contributions such as the SECURE 2.0 Act requirement for high earner catch-up contributions to be made in the form of Roth contributions effective in 2026. It would be quite unfortunate if retirement savings tax incentives are greatly changed. Access to robust retirement savings programs that don’t penalize savers and provide meaningful benefits for all employees should be a goal, which would enable retirees to have sufficient income in their later years and alleviate a drain on social programs in the future.”
Ironically, while some see lowering the savings limit as politically palatable because it impacts only a small segment of the population, that same fact reduces the effect of such a policy shift.
“There is some sentiment to cut back on the amount of deferrals allowed as those limits affect mostly the higher earners,” says John Lowell, a partner at October Three Consulting in Woodstock, Georgia. “But, the savings inherent in such a cutback are likely to be small as compared to the price of tax cuts. While their tax treatment might be sacred ground, taxation of some healthcare benefits has often been brought up as a way to save money in a bill.”
Indeed, if you look at the actual numbers, to actually achieve a significant offset would require alarming changes in the deferral caps.
“Over the past 10 years, the average deferral rate for plans administered by Vanguard (How America Saves 2024) has been between 6.8% and 7.4% of pay,” says Jack Towarnicky, Of Counsel for Koehler Fitzgerald, LLC in Powell, Ohio. “In the PSCA 67th Annual Survey, the average 2023 contribution among surveyed employers was 7.8%. However, in the Vanguard survey, less than 3% of participants contributed the dollar maximum, and less than 3% of participants contributed catch-up contributions (that’s the combination of workers age 50+ who also deferred more than the 402(g) maximum, which is probably close to 1 in 4 individuals age 50+). So, to raise even a modest amount of revenue, you would have to return to the TRA’86 inside limit on deferrals of $7,000 (reducing both the annual limit of $23,500 and eliminating catch-up of $7,500 / $11,250 (which would generally impact only workers earning in excess of $100,000 – that would be about 1 in 10 wage earners given that some are not eligible to participate in a 401k or 403b plan).”
As a result, this avenue of offsetting the extension of tax rate cuts appears to be a non-starter.
“It would be a huge surprise if Congress reduced or cut back on the current annual retirement plan limits and the tax cuts associated with them,” says Richard Cohen, chair of Shipman & Goodwin’s Employee Benefits Practice Group in Hartford, Connecticut. “Congress, within the past five years, passed two massive Retirement Plan expansion laws (SECURE 1.0 in 2019 and SECURE 2.0 in 2022). The SECURE acronym stands for ‘Setting Every Community Up for Retirement Enhancement.’ It will take a few years to see whether these laws achieved their goals of helping more workers save for their retirements and encouraging more employers to establish retirement plans for their workers. Achieving results in these important areas takes time. For Congress to reverse course now and cut back some of the higher limits put into the law in the last 5 years would be a shock. Since the data suggests that many Americans are far behind in saving enough for retirement, reducing the higher annual limits will make it more difficult for many Americans to get on track or ahead of where they need to be to enjoy a comfortable retirement.”
Because we haven’t yet had enough time to see if the current rate schedule will yield positive results, a mid-course correction at this time might prove more damaging than it’s worth.
“Cutting back on retirement plan contribution limits would be counterproductive to the long-term financial stability of workers,” says Brandy Burch, CEO, Benefitbay in Kansas City, Missouri. “Instead, Congress should focus on more targeted spending cuts in nonessential areas to preserve tools that encourage retirement savings. Retirement savings should be incentivized, not constrained.”
Clearly, cutting contribution caps causes concern.
“Congress has made a lot of progress in recent years to address issues that are preventing Americans from saving for retirement through SECURE and SECURE 2.0,” says Liana Magner, EVP, Head of Retirement and Institutional for Natixis Investment Managers in Boston, Massachusetts. “If they want to build upon this work, and to help Americans of all generations prepare for retirement, undoing tax incentives, which research shows ranks among the very top incentives that induce people to save, is not the answer.”
More importantly, you can’t look at this without considering the administration’s view. Congress might have an idea or two about what to do, but the Executive Branch has its own point of view.
“The Tax Cuts and Jobs Act was part of Trump’s growth-oriented policies from his first term,” says Eric Steffy, founder & CEO at Federal Solutions Support in Daytona Beach, Florida. “It’s a feather in his cap he’s not likely to surrender. Trump’s commitment to reducing taxes to fuel the U.S. economy is likely to remain a priority, which means that Congress is going to have to come up with other ways to manage the budget. Some of that budget management is going to come when Congress cuts costs (with contribution from the DOGE), reduces benefits (requiring Medicaid recipients to work), or eliminates other tax breaks (like the mortgage tax deduction). Cutting back on retirement plan contributions is the antithesis of Trump’s plan to help citizens be able to support themselves throughout their lives. President Trump’s SECURE Act, signed in his first term, was renewed as SECURE 2.0 two years ago with near unanimous support. For Trump, this is a legacy plan that strengthens the retirement system, and not one likely to be revoked in the next four years.”
Retirement professionals tend to have a greater understanding of economics than politicians. The latter sees the world as a static zero-sum game. That’s why Congress requires cutting a dollar of spending for every dollar of tax cuts. Those in the real world see policy changes in a more dynamic light. Changing policies will change behavior, and that might be a self-correcting mechanism.
“If tax cuts ultimately lead to increased revenue, spending cuts may not be necessary,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “Nevertheless, by reducing inefficiencies in federal programs and eliminating wasteful or redundant expenditures it puts the government on the right path to ensure fiscal responsibility. Streamlining administrative costs and cutting funding for outdated initiatives would enhance government efficiency without impacting essential services or economic growth. With rising revenues, such adjustments could focus on improving fiscal discipline rather than ‘paying for’ tax cuts.”
Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions.