There’s a lot of hoopla surrounding President Trump’s new tax plan, which is reportedly considering capping pre-tax 401(k) contributions at $2,400 a year , a far cry from the current maximum contribution of $18,000 for 2017, and $18,500 for 2018 .
But the reality is this: Two-thirds of Americans aren’t even saving money in a 401(k) , let alone maxing out their contributions each year.
In fact, according to data from Vanguard, just 4% of people earning below $50,000 a year max out their 401(k) at the current limits, and 11% of people who make between $50,000 and $100,000 do. People making over $100,000 are the most likely to max out their 401(k), perhaps unsurprisingly, with 32% making the highest allowable contribution.In some versions of the rumored tax proposal, additional retirement savings would still be possible, but would be directed to a post-tax Roth 401(k) instead, reports Business Insider’s Lauren Lyons Cole .
Roth 401(k) contributions are deducted from your paycheck, just like traditional 401(k) contributions. Both types of accounts share the same maximum contribution and investment options. The only difference is when you pay taxes.
Saving in a traditional 401(k) is cheaper today because it allows you to postpone paying taxes until you begin taking withdrawals in retirement. That’s one reason financial professionals like the account so much – theoretically, people will put more money into the account if it takes less of their paycheck to do so.
And yet, only 41% of workers are saving in a 401(k) at the 79% of American companies that offer a plan to employees, Bloomberg reported earlier this year.
Roth 401(k) contributions are deducted from your paycheck as well, but the amount is funded with your take-home pay instead. Meaning, for every $1,000 you save for retirement, you’ll have to fork over $200 or so to the IRS $200, depending on your tax bracket .
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