Do Trump's Troubles Take Any Heat Off 401(k)s?
The naming of a special counsel to investigate possible ties between U.S. President Donald Trump’s campaign and Russia offers at least one golden nugget to politicians on Capitol Hill: a chance to reset major policy initiatives.
“Trump can now focus on getting his health-care legislation and tax cuts through the Senate,” opined Bloomberg News on Thursday after ex-FBI director Robert Mueller was picked to lead an independent probe. In effect, the news agency suggests, the move “has offered the president a reset.”
At least initially, financial markets also seem to be taking a positive view of Mueller’s appointment. The S&P 500 closed Thursday up 0.37%. “Net-net we believe Trump’s agenda is still bullish for stocks,” advisor David Kudla of Mainstay Capital Management tells Dow Jones' MarketWatch news site.
Still, Trump’s team faces a daunting stack of policy issues to sort through, says Michael Delgass, chief executive of Sontag Advisory in New York. The tax lawyer-turned-advisor, whose independent RIA manages about $4.9 billion, believes it’s unlikely major tax reforms will touch clients this year.
Earlier this month, lawmakers and investment managers debated whether Trump’s team might see higher taxes on 401(k) plan contributions as a way to help pay for big corporate and personal tax cuts, Bloomberg reports.
As it stands now, part of employees’ earnings can be deferred from taking an immediate tax hit by participating in their corporate defined-contribution plans. While withdrawals later are counted as ordinary income, investment money is allowed to grow on a tax-deferred basis.
The fear, says Delgass, is that Trump’s proposal – which has only been put forth so far in bullet point form – calls for the elimination of itemized deductions, excluding those for mortgages and charitable giving.
But tax experts like Delgass argue that 401(k) deductions are a different kind of animal. Such pre-tax contributions, he points out, don’t typically show up on most taxpayers’ schedule A forms where itemized deductions normally are reported. “So we just don’t think it’s likely that Trump’s tax cut plan will wind up including 401(k) contributions,” he says.
Ryan Linenger, a partner and advisor in Chicago at Plante Moran, is also skeptical about tax-friendly features of traditional 401(k) plan contributions being capped or removed.
But as a veteran planner at the Southfield, Mich.-based accountancy, whose financial-advice group manages about $11.9 billion, he’s been using such headlines as talking points about the value of planning ahead for retirement.
Linenger is explaining to longtime clients that tax-deferred investment money isn’t part of the debate. Also excluded so far is talk of reforming 401(k) Roth plans, which don’t usually tax withdrawals and allow compounding of gains in a "tax-friendly" manner.
For high-income wage earners, though, Linenger sees problems with Roth 401(k) investing. They might not feel so positive about not being able to use pre-tax contributions to count against their ordinary federal income tax bills, thereby lowering their current tax liabilities.
Also, many of Linenger’s clients now in the highest tax brackets presumably will find themselves in a lower bracket in retirement. “So based on current tax laws, while a Roth might still be a good benefit in some ways,” he says, “it won’t be as good of a way for many high-income earners to defer taxes as a pre-tax 401(k) plan.”
Donna Cuiffo, an advisor at Clarfeld Financial Advisors in Tarrytown, N.Y., is interested in what happens with calls to roll back the Alternative Minimum Tax, or AMT.
Basically, that’s an extra calculation that forces high-income earners to “add back” deductions for items related to state and real estate taxes into the income equation, according to Cuiffo, whose firm manages about $6 billion.
“The AMT really tends to hurt people in high-tax states who earn in the $200,000 to $800,000 range,” she says.
Cuiffo is advising her clients to keep contributing to their 401(k) plans and reassuring families that could be impacted by any change in AMT taxes that she’s closely monitoring events in Washington, D.C.
“We’re letting people know that this new administration’s tax cut plan amounts to a wish list at this point,” says Cuiffo. “More of the meat is going to have to be put on the table before we'll be able to start exploring any of their possible alternative tax planning options."