How the One Big Beautiful Bill Act Keeps 401(k)s Intact, Adds New Deductions

On the Fourth of July, President Donald J. Trump signed the One Big Beautiful Bill Act (OBBBA) into law. Early drafts of the OBBBA contained provisions that may have negatively impacted 401(k) plans. Thankfully, the final version of the law leaves the retirement planning system essentially unchanged.

The OBBBA makes no changes to 401(k) contribution limits and SECURE Act 2.0 legislation will continue to be the driving force for regulatory change within retirement plans. Although the OBBBA left retirement planning largely untouched, several measures in the bill could impact individual taxpayers.

Most notably, the OBBBA preserves tax cuts from Trump’s first term that were set to expire at the end of this year, including the elevated standard deduction. The law also introduces several new tax deductions for qualified individuals. In this article, we’ll briefly review these key provisions and describe how employees may be able to reduce their tax burden.

OBBBA: Three Key Deductions

When the OBBBA was first being drafted, President Trump proposed eliminating taxes on tips, overtime, and Social Security. Ultimately, it proved infeasible to eliminate these taxes in full. However, the proposals inspired several provisions that made it into the final version of the law.

• Tipped income deduction. The OBBBA allows workers to deduct up to $25,000 in tipped income. Only occupations that customarily receive tips are eligible for this deduction, a category still being determined by the Treasury Secretary. This deduction begins to phase out at $150,000 income for single filers and $300,000 for joint filers.
• Overtime income deduction. The OBBBA also allows workers to deduct up to $12,500 in overtime earnings. Workers entitled to overtime pay under the Fair Labor Standards Act are expected to qualify. This deduction also begins to phase out at $150,000 in income for single filers and $300,000 for joint filers.
• Enhanced senior deduction. While Social Security income will continue to be taxed, the OBBBA introduces an additional $6,000 deduction for individuals over the age of 65. This deduction can be claimed in addition to existing senior deductions. While the new deduction begins to phase out at $75,000 in income for single filers and $150,000 for joint filers, there is a generous phase-out range of $100,000 for each.

Importantly, all of these deductions can be claimed on top of the standard deduction. Taxpayers do not need to itemize to benefit. In addition, the OBBBA includes several smaller provisions that may benefit some taxpayers, including deductible car loan interest for US assembled vehicles and an enhanced charitable deduction.

Conclusion: Stability Amid Change

Although the OBBBA leaves the retirement planning system essentially unaffected, the law did introduce a new tax-advantaged investment tool: Trump Accounts. These accounts are designed as a childhood savings vehicle, allowing parents and legal guardians to make annual contributions up to $5,000 on behalf of minors.

Employers are also eligible to contribute up to $2,500 to these accounts, offering a potential added benefit for workers with families. Moreover, the Federal government is expected to contribute an extra $1,000 on behalf of US citizens born between 2025 and 2028. As the IRS releases additional guidance on Trump accounts, families will gain additional clarity on how
they compare to other options for childhood savings, such as 529 plans.

Ultimately, the OBBBA is most significant not for what it implemented, but for what it avoided. By cementing tax cuts made in Trump’s first term, including an increased standard deduction, individuals avoided an unpleasant tax hike at the end of the year. Still, several new deductions could reduce employee tax burdens, and the absence of 401(k) changes offers valuable stability for the retirement planning system.