Tax Laws May Change
One of the benefits of a 401(k) plan is that it encourages saving for the long haul. Unfortunately, over a time period of 20, 30, 40 or even 50 years, it’s next to impossible to predict how tax laws will change. The Tax Cuts and Jobs Act of 2017 lowered personal income tax rates across the board, but the next Congress — or the one after that, or the one after that — might turn around and raise taxes to all-time highs.
This means that contributions made today might get hit hard when it comes time to make a withdrawal. Imagine you’re in the 12% tax bracket today. A $10,000 contribution will generate $1,200 in tax savings. However, if tax rates rise to 25% by the time you retire, you’ll owe $2,500 in taxes on that same contribution.
