Is Congress Really Talking About Slashing Contribution Limits to 401ks including the Self-Directed Solo 401k ?

No. If they were, it would be big news to many of our clients, who went through the trouble of setting up a Self-Directed Solo 401k for their small businesses or consulting ventures. And there’s some talk in the media about Congressional Republicans pushing to slash allowable contribution limits to around $2,400.

The New York Times writes it up here:

House Republicans are considering a plan to sharply reduce the amount of income American workers can save in tax-deferred retirement accounts as part of a broad effort to rewrite the tax code, according to lobbyists, tax consultants and congressional Democrats.

Notably absent from the story: Any language that’s actually in a bill on the House floor. More than that, there’s also the notable absence of a single Republican lawmaker that has ever, ever publicly advocated to reduce allowable 401k contributions to that level.

Moreover, there’s not even a single named source on record saying that this is what the GOP is floating.

It would also put a major dent in the GOP brand, which at least ostensibly seeks to reduce the tax burden on working Americans and businesses.

It seems to us that a bunch of wonks at a planning session were looking at potential ways to offset revenue losses from a planned corporate income tax rate cut, and when they keyed in what they’d have to cap the allowable 401k contribution rate at to recoup the revenue loss, the computer spat out a figure close to $2,400. Nobody wanted to do it, but someone in the room ran to the media “on background,” unwilling to put his own name to the story, and the knuckleheads ran with it.

Our take: It is exceedingly unlikely that the GOP tax reform bill will contain any large reduction in allowable 401k contributions – at least not without a corresponding increase in contribution limits to alternative investment vehicles like IRAs and self-directed IRAs. Messing with 401ks – the primary retirement savings vehicle of the middle class – would be likely to cause an electoral revolt. The Obama administration had to quickly abandon a push to tax Section 529 plans a few years ago, as the Times notes in their article.

There is some legislative risk to those sitting on so-called “jumbo” IRAs, including jumbo self-directed IRAs, with assets above about $5 million. If any tax-advantaged investment account counts as ‘low-hanging fruit’ to revenue-hungry Congressional representatives, it’s those.

Naturally, self-directed IRA owners are over-represented among jumbo IRA account owners, because people that are able to amass $5 million or more in IRAs tend to be successful real estate and venture capital or private equity investors.

At this point, we don’t see any major legislative risks to the Self-Directed Solo 401k structure, though we’ll be keeping an eye on developments as the Republicans in Congress cobble together their expected proposal for tax reform.