Tax Laws May Change

One of the advantages of a 401(k) plan is that it promotes long-term savings. This means that in 20, 30, 40 or even 50 years, it’s practically impossible to know how tax laws will change or evolve. For example, the Tax Cuts and Jobs Act in 2017 reduced the personal income tax rates but these may very well increase to all-time highs following a new act of the Congress. This might seriously affect your contributions when the time comes to make a withdrawal.

Put simply, if you’re currently in the 12% tax bracket, a $10,000 contribution will generate $1,200 in tax savings. If the tax rate increases to 25% by the time you reach your retirement age, you’ll have to pay $2,500 in taxes on that same contribution.