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