You Could Benefit From the Congressional Proposal to Expand 401(k) ‘Catch-Up’ Contributions

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Some older workers may be in luck. Under pending legislation in Congress, catch-up contributions — a type of contribution that allows older workers to make additional contributions to retirement savings accounts — may be expanded for workers in their 60s. This push is part of a bipartisan effort to address a lack of retirement savings in U.S. households, reports CNBC; however, the House and Senate are going back and forth over a few details, including the overall tax treatment of catch-up amounts.

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Under current law, according to the Internal Revenue Service, people aged 50 or older by the end of the calendar year can make annual catch-up contributions. Annual catch-up contributions up to $6,500 for the 2021 tax year are permitted by these plans:

  • 401(k) (other than a SIMPLE 401(k))
  • 403(b)
  • governmental 457(b)

You can also make catch-up contributions to your traditional or Roth IRA up to $1,000 for 2021. This is on top of the standard annual contribution limit, which is $19,500 for 401(k) plans and $6,000 for IRAs.

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These contributions were intended to help those who didn’t save much when they were younger, CNBC noted. However, CNBC also pointed out that only 15% of eligible savers use catch-up contributions, according to Vanguard’s 2021 How America Saves report, and account holders with above-average income are typically the ones taking advantage of catch-up contributions.

The House bill is proposing catch-up contributions of $10,000 to 401(k) plans for anyone age 62, 63 or 64, CNBC reported. The House bill is also aiming to eliminate up-front tax benefits but make qualified withdrawals tax-free, similar to a Roth IRA. Additionally, workers enrolled in SIMPLE plans would be allowed $5,000 in catch-up contributions, up from $3,000.

In the Senate bill, CNBC reported that catch-up contributions to a 401(k) could be as much as $10,000 to people aged 60 or older. The Senate is also not proposing to change the pre-tax treatment of catch-up contributions.

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This proposed expansion could make a big difference to those nearing retirement age. Those savers could “front-load their retirement savings when there’s a little time left,” Michelle Riiska, a financial planning consultant at eMoney Advisor, told CNBC.

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About the Author

Josephine Nesbit is a freelance writer specializing in real estate and personal finance. She grew up in New England but is now based out of Ohio where she attended The Ohio State University and lives with her two toddlers and fiancé. Her work has appeared in print and online publications such as Fox Business and Scotsman Guide.
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