New Tax Law and Your 401(k): Should You Contribute More?
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What is the main topic discussed in this episode?
With your money briefing, I'm J.R. Whalen at The Wall Street Journal in New York.
How is the new tax law affecting personal finance choices right now?
The new tax law is changing up a lot of things related to personal finance. Should that include higher contributions to your 401k? We'll explain in a moment. First, these money and market stories you should know. The sales of previously owned homes fell 1.2% in January as compared to December. It was the third consecutive month of declining sales. In January, 4.94 million home sales were the lowest since November of 2015. But if mortgage interest rates remain low, that could spark a turnaround in sales. The average rate on a 30-year fixed-rate mortgage was 4.35%, and the week ended February 21st. That's down 4.94% in mid-November. The number of consumers who have access to a credit card hit a record high of 178.6 million at the close of 2018.
In fact, 4 million new people gained access to credit cards last year. That's the word from credit reporting agency TransUnion. But it was subprime borrowers who gained access to plastic the most last year, and they're a group with typically less than stellar credit and likely to face a higher interest rate as a result. And on top of that, their balances grew by about 7%, the highest of any group. The average balance across all groups rose last year by about 5%.
What early market and consumer trends should taxpayers notice before adjusting 401(k) contributions?
And it seems we're all trying to save a dollar here and there. And that goes for the Tooth Fairy as well. A poll by Delta Dental called the Original Tooth Fairy Poll Yes, there's a poll for everything. Surveyed more than 1,000 parents of kids ages 6 to 12, and it found a tooth brings in on average $3.70 under the pillow. That's down from $4.13 last year. It's the second straight year of declines in the value of lost teeth. And by the way, $4 for a lost tooth. How big are these teeth? When I was a kid, I was lucky to get 50 cents or a dollar, and that was even when I accidentally swallowed the tooth.
Why might the SALT deduction cap make 401(k) contributions more attractive?
And kids in the western part of the U.S. got an average of $4.19. That's the highest of any region. And about half of parents nationwide polled said their kids chose to save the money earned from the tooth fairy.
The new tax law has changed the way many taxpayers approach things like payroll deductions and giving monetary gifts to children. It could also result in people contributing more to their 401k retirement accounts. That's the feeling of Alicia Minnell. She's director of the Center for Retirement Research at Boston College, and she's on the line with us to discuss. So, Alicia, you see the cap on state and local tax deductions playing a significant role here.
I'd say potentially playing a significant role.
How do homeowners’ tendencies to preserve home equity influence retirement saving decisions?
The two big ways that people save for retirement are through their 401k plans or paying off their mortgages and building up home equities in their house. And both of them are treated favorably under the tax code. And my thought was that if you make housing less attractive, which is what the cap on state and local taxes does, then you may make 401k saving more attractive.
In the column you wrote for the Wall Street Journal, you say that retirees are reluctant to tap into their home equity. Should they be doing that?
That's a really good point, because if people were equally likely to access their home equity as they were 401ks, I guess I wouldn't care which they save through. But people are so reluctant to tap their home equity, either by downsizing or taking off a reverse mortgage or property tax deferral. They just want to preserve their home intact to leave it as a bequest or in case they need long-term care of some sort at the end of their life. So they don't tap it.
And you're doing research across zip codes into the relationship between housing prices and 401k contributions.
Yeah, it's the same issue just in another way. We were thinking about doing that before the cap was actually put on the state and local taxes and basically looking across the country to see if And areas where people are investing a lot in their houses, whether they're saving relatively less in their 401k, of course, trying to, you know, hold constant things like education levels and wealth levels and income levels and all that kind of personal information.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:09
2
How is the new tax law affecting personal finance choices right now?
0:09–1:23
3
What early market and consumer trends should taxpayers notice before adjusting 401(k) contributions?
1:23–2:00
4
Why might the SALT deduction cap make 401(k) contributions more attractive?
2:00–2:46
5
How do homeowners’ tendencies to preserve home equity influence retirement saving decisions?
2:46–4:47
6
Should retirees tap home equity or rely more on 401(k) savings in retirement?
4:47–5:38
7
If the SALT cap remains, how could it permanently change saving patterns between housing and retirement accounts?
5:38–6:05
Speakers
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