Madison.com by Sean Williams 9/23/2017
It's no secret, so let's just say it: We absolutely stink at saving money. Among developed countries, Americans have one of the lowest personal saving rates. According to the St. Louis Federal Reserve, as of July 2017, Americans were socking away just 3.5% of their disposable income, or $3.50 out of every $100 they earned, which is well below the 10% to 15% of earned income that financial advisors recommend workers put away for retirement and an emergency fund.
Saving such a small amount of their paychecks is leaving far too many people reliant on Social Security, which is struggling with its own issues at the moment, and it requires that workers invest flawlessly in order to have a sizable nest egg come retirement. The retirement path we're on as a country right now simply isn't sustainable -- and it could get worse.
Individual and corporate tax reforms come into view
During his election campaign, President Donald Trump promised the nation sweeping tax reforms, including a simplification of the individual U.S. tax code, as well as a lowering of the corporate income-tax rate. At a peak marginal tax of 35%, U.S. corporations are paying one of the highest income-tax rates in the world, which Trump believes is putting these companies (and the U.S. in general) at a distinct disadvantage. Trump has reiterated multiple times since becoming president, and during his campaign, that he would ideally like to see Congress pass a tax reform bill to lower the peak corporate income-tax rate to just 15%.
But there's a catch to putting more money into the pockets of corporations, which Trump and Republicans believe will boost the U.S. economic growth rate, lead to more hiring, and increase wages. Namely, it'll take about $2 trillion in federal revenue off the table over the next decade, at least according to estimates from the Tax Foundation, a nonpartisan research institute. In order for Trump's tax reforms to be revenue-neutral over the decade, he'd need to find a way to increase federal revenue by $2 billion.
One way Trump and his GOP colleagues are aiming to do this is by cost-cutting. Trimming the fat in Washington, and potentially reforming healthcare by cutting Medicaid spending substantially over the next decade, could markedly reduce the expected $2 trillion shortfall from cutting corporate income-tax rates.
Republicans are considering a big change to America's top saving tool
But cost-cutting alone wouldn't be enough, which is why the highly unpopular idea of making changes to the employer-sponsored 401(k) has crept into view. As of March 2017, 55 million workers had more than $5 trillion invested in 401(k)s, making it the top saving tool among working Americans.
The idea being floated around Capitol Hill is that lawmakers want to alter the tax treatment of 401(k)s, which are currently tax-deferred plans. In other words, money currently contributed to a 401(k) is considered pre-tax -- thus lowering your current-year tax liability -- and allowed to grow on a tax-deferred basis until you begin making withdrawals. Ordinary federal income tax becomes due when account holders begin taking money out of the 401(k).
Lawmakers are considering a change to make contributions to 401(k)s after-tax, thus taxing contributions up front and allowing account holders to take withdrawals on a tax-free basis when they retire. If this sounds familiar, it's because this is what a Roth IRA does (after-tax money growing over the long term on a tax-free basis). Pundits have suggested that this plan would "Rothify" the 401(k), giving the federal government more money up front to help cover its corporate-tax cuts.
More:
http://host.madison.com/business/investment/markets-and-stocks/reasons-k-tax-reform-could-decimate-the-middle-class/article_a62d3c96-60fb-5df3-9652-692fa9bb7316.html
