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Kevin Brady’s Plan To Push People Out of 401(K)s Puts Middle Class Savings at Risk of Future Tax Hikes

The Associated Press
AP Photo/Evan Vucci
JOHN CARNEY

A plan by House Leaders to push people out of 401(k) retirement accounts could wind up forcing middle-class families to pay taxes twice on their income.

“It’s incredibly stupid to believe that the government will not go after this big pool of savings in the future,” said Stephen Moore, a fellow at the Heritage Foundation who served as one of the top economic advisers to Donald Trump’s 2016 campaign, in an interview with Breitbart News. “Stupid, stupid, stupid.”

Rep. Kevin Brady, the Texas Republican who heads the Ways and Means Committee, wants to dramatically lower the cap on 401(k) accounts, which allow taxpayers to designate retirement savings that will not be taxed until they are withdrawn. His plan would push savings into so-called Roth IRA, which tax retirement savings when they are earned but which the government says it will not tax when they are withdrawn.

President Trump has said that the 401(k) plans, which are popular with middle and upper middle-income American workers, will not be changed. But the idea remains on the table on Capitol Hill, according to people briefed on the matter. The attraction is simple to understand: by taxing savings now, the change would increase federal revenue and offset some of the revenue losses from corporate tax cuts.

Many critics of Brady’s 401(k) change have pointed out that the long-term effect could be neutral to negative. If the savings go from 401(k)s to Roth type deposits, the government would simply be exchanging future revenue for present revenue. It has been accurately described as simply another form of debt, alleviating current budget woes but increasing future fiscal burdens. It could also decrease the incentives and ability to save, putting further strain on future federal budgets as retirees rely more on government spending than private savings.

Less appreciated is the danger that future changes in tax policy could result in the Roth savings being taxed a second time. The large pool of savings in Roth like accounts will be an inviting target for lawmakers and others looking for new sources of revenue, according to Moore.

“Anyone who believes the promise of a Roth IRA is crazy,” Moore said. “There is a very serious risk–really, a very serious likelihood–that tax-and-spend politicians will see this huge pool of money and decide to tax it again. Only an idiot would trust the government’s promise not tax these things again.”

This would make Brady’s plan amount to a very, very large tax hike on many middle-class workers. At the very least, it puts savings at risk of being double-taxed, according to Moore.

Moore’s advice is that Republicans “leave 401(k)s alone” and focus on putting out a plan that emphasizes accelerating economic growth.

“If they want to be fiscally responsible, why don’t they cut some spending?” Moore said.

 

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