Like most people, we were interested to see the details of President Trump’s new tax plan. The existing private-sector retirement system allows middle-class Americans to make the most of their retirement dollars, so we were pleased to see US House of Representatives’ “Tax Cuts & Jobs Act” preserve popular retirement savings options that help Americans save for their retirement, such as 401(k) plans and Individual Retirement Accounts (IRAs).
With the passage of the plan in the House, its fate now rests in the hands of the Senate.
However, the debate is not yet over. The Senate had unveiled a version of the plan November 9 which imparted a few changes to the original House plan. One of these relates to the so-called “catch-up” provision. Currently, all individuals over the age of 50 can make extra pre-tax (catch-up) contributions to their defined contribution plans—that is, contribute a bit more money than younger individuals on a pre-tax basis to help them “catch up” so to speak on their efforts to save for retirement.
Under the Senate’s earlier proposal, individuals making $500,000 or more would not be able to take advantage of the catch-up provision. This would impart a “means-based” testing system.
On November 13, Senate Finance Committee Chairman Orrin Hatch proposed some additional tweaks to the Senate proposal, namely in the area of the catch-up provisions. As a means-based testing system could be problematic for a number of reasons, we were pleased to see Hatch’s revised proposal did not contain it.
His subsequent proposal would require all catch-up contributions to section 401(k), 403(b) and 457(b) plans be made on an after-tax basis—that is, as Roth plans.1
The carrot, if you will, is that the current $6,000 catch-up contribution limit would be raised to $9,000. Keep in mind, everyone, including those older than 50, would continue to be eligible to make pre-tax contributions of up to $18,500 a year. These changes would only apply to the additional catch-up amounts for those over age 50.
Hatch has since released further modifications removing the means testing catch-up contributions.
The process is ongoing, and we’ll be watching carefully for further revisions and developments.