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Susan Tompor: The 401(k) looks better after a bull market but what happens in Washington could hurt

Susan Tompor, Detroit Free Press on

Published in Home and Consumer News

Hanging on has paid off for baby boomers who saw their 401(k) savings get burned in the Great Recession.

Average account balances for boomers who steadily contributed to a 401(k) are now far higher than those balances were before the recession took hold in December 2007, according to a report released last week by Fidelity Investments.

The average 401(k) account balance for baby boomers was $115,000 in June 2007. After the downturn, those average balances had plummeted to $85,000 by early 2009.

But as of June 2017, the average balance for baby boomers who kept consistently investing in their 401(k) plans in the past 10 years had climbed to $315,000.

It's safe to say that many people are no longer grumbling about their miserable 401(k) -- if they kept investing. The Dow Jones industrial average has zoomed above 24,000.

But 401(k)s are at the center of a heated debate. The latest buzz out of Washington is that middle-class families could lose a huge chunk of the popular tax break associated with setting aside money into 401(k) plans, as part of tax reform negotiations in Congress.

President Donald Trump tweeted: "There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!"

But GOP lawmakers are floating a plan to reduce how much workers can set aside each year on a tax-deferred basis.

Plenty of moving parts exist on this one. But there's talk that Republicans are considering capping the pre-tax limit for contributions to as low as $2,400.

The expectation is that you'd still be able to contribute more money into a 401(k) plan even with that low pre-tax limit. But the additional money would be taxed first and then invested on an after-tax basis. It's possible that the after-tax money would go into Roth 401(k) accounts, and if so, the withdrawals from those Roth accounts would not be taxed in retirement.

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