The incoming Trump administration will be under time and political pressure to extend as many of the expiring Tax Cuts and Jobs Act tax provisions as possible. If reform advocates draw attention to other elements of the tax code -- such as by calling for expanded flexibility for 403(b) retirement accounts -- there could be unintended consequences.
If extending the TCJA provisions are the administration's top tax priority, every other policy may be seen as a potential target for cuts. Advocates for retirement account tax reform should bide their time and wait for a less risky moment to push for beneficial changes.
The TCJA was a landmark piece of legislation for the first Trump administration when it was passed in 2017. It reshaped the tax code with sweeping changes for individuals, businesses, and retirement accounts.
Despite the scale of change, some persistent policy issues that advocates hoped would be included were left unaddressed, such as the continued disallowance of collective investment fund access for 403(b) plans, despite access being permitted for similar 401(k) plans. Meanwhile, temporary provisions facilitated many of the changes. As those provisions approach their expiration, the incoming administration faces significant decisions on short-term policy priorities.
Extending all the cuts is projected to cost $4.6 trillion over the next decade -- a staggering fiscal challenge for policymakers. While the TCJA itself was intended to drive economic growth, extending its expiring provisions -- from lower marginal tax rates to the expanded standard deduction -- comes with a significant price tag.
Policymakers will need to grapple with how to offset the costs of the extensions while staying aligned with the administration's policy positions and tax priorities. In this context, retirement savings vehicles such as 403(b) plans, geared toward public employees and employees of tax-exempt organizations, may be seen more as a candidate for cuts than for beneficial reform.
Retirement savings is a significant percentage of tax expenditures -- tax revenue not collected because of preferred tax treatment. The Tax Policy Center found such expenditures totaled more than $300 billion in 2022, and it estimates that number will exceed $2 trillion over the 2022-2026 period. As one of the largest categories of expenditures, retirement savings plans may become an attractive target for scrutiny in budget negotiations.
Although retirement savings incentives are critical to encouraging long-term savings, their scale makes them difficult to be ignore during efforts to offset the cost of other priorities. In an environment where every dollar of tax expenditure will be scrutinized, retirement savings provisions may face pressure despite their importance. Hypothetically cutting provisions to help extend TCJA provisions could be couched politically as not harming retirees because of benefits they would receive via the extended cuts.
Retirement accounts haven't historically been above targeting during budget discussions. The TCJA itself eliminated the ability to recharacterize Roth IRA conversions -- an arguably sound policy decision but still a reduction in flexibility for retirement savers.
The vulnerability of retirement accounts, including 401(k) plans, further came to light in 2017 when proposed changes narrowly escaped implementation following public backlash and a social media post from then-President Donald Trump assuring Americans there would be no changes made to 401(k) plans. If political will saved them from the chopping block last time, the president-elect's focus elsewhere may suggest they won't be saved this time around.
In contrast to 401(k) plans, which are directed toward a broad swath of private-sector workers, 403(b) plans cater to public schools, health-care organizations, and nonprofit groups -- constituent blocs less likely to be on the Trump administration's radar for favorable reforms.
The interplay of politics and policy illustrates the importance of strategic advocacy. In an administration that will likely focus on extending the TCJA and managing its cost, retirement savings plans may become collateral damage if advocates bring attention to them.
While the risk to 403(b) plans may be particularly acute, Roth IRAs and 401(k)s may be better positioned to weather the TCJA extension talks, as they align better with middle- and upper-income earners' priorities.
Retirement account advocates should avoid tying the fates of 403(b) collective investment trust allowance and 401(k) benefits together. Doing so would potentially connect the political in-group and out-group together for uniform tax treatment.
At a time when policymakers are tasked with managing a $4.6 trillion bill, even minor requested reforms to 403(b) plans could invite scrutiny and bring unintended consequences. Rather than push for enhancements, advocates may need to prioritize preserving the status quo and prevent retirement accounts from being reframed as cost-saving opportunities.
The lesson from the TCJA is clear: Tax policy decisions aren't made in isolation. By avoiding unnecessary attention and leaving tweaks around the relative margins for a later date, advocates can best protect the long-term security of retirement savings. Strategic patience, rather than immediate reform, will be the most prudent course of action in the near term.