So if you're one of the 132 million workers who contribute to a 401k plan, or something similar, a group of Republicans in the house want to slash the amount of money you can put away every year before taxes... and it's significant.
If they get their way it would knock the maximum pre-tax annual contribution to your 401k from $18,000 to measly $2,400.
By the way, if you are over 50, you can put $24,000 away before taxes.
Now look, Americans suck at saving as it is... so, let's walk thru their cockamie logic and look at what these lawmakers want you to do with that $15,600 that may no longer qualify to be put away pre-taxed.
It's being dubbed the big Rothification..
The first thing you need to know is the difference between a regular 401k and a Roth 401k
With the 401k that we all know and love -- money comes out of your paycheck before you get hit with taxes. It goes into a separate account to grow until you retire - when you start to pull the money out at age 59.5, you will then pay tax on that cash.
With a Roth 401k, the same contribution amounts and withdrawal rules apply. The big difference is your contributions are taxed now!
So you first pay tax on the money - then up to 18000 is set aside in an account for you until you get old.
When you withdraw then - no taxes....money and compounding is all yours - tax-free.
Sounds great right? Well, it depends -
If you think your tax rate will be lower in retirement, then the old school 401k is probably your best answer.
But if you expect your earnings and therefore your tax rate to increase exponentially -- maybe the Roth 401k is a good idea for you
You need to talk to a financial planner - not the government - and herein lies the problem
The GOP may actually believe it's a financially better idea for everyone -- but when does a one-size-fits-all approach really work anyway? Sounds like they are trying to get the tax dollars up front, to fund cuts elsewhere.
Because If they take away the tax deferral on 85% of the 18000, they get all that $money now as opposed to when you retire and withdraw.
Many will say they are not really thinking this thru - the tax deferral is a HUUUUGE incentive to save - and we need that -please don't tell me you're relying on Social Security.
As it is, the average person barely saves $2500 a year (shame on you by the way) but that just means they're not going to collect as much taxes as they think they are. Sound familiar?
So is it really worth taking away the America tax incentive to save?
I'll leave that up to you to decide.
You can learn a whole lot more about this on thestreet.com.