401k and 403b Contributions Still on the Chopping Block-Why It Matters

                    By Carol Buckmann                                     carol@cohenbuckmann.com 

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Many of us were breathing a sigh of relief that the House tax bill did not cut back on pre-tax 401k contributions as had been threatened.  We soon learned that the threat to retirement savings hadn’t ended, it was just coming from a new front.  The Senate is now considering cutting back on contributions under 401k, 403b and 457 plans, which remains bad retirement policy for many reasons, but mostly because we know that Americans are not saving enough for retirement as it is.  (See my recent blog for Penchecks- http://www.penchecks.com/wrong-policy-wrong-time-save-401k-contribution/- for some sobering information about the retirement savings gap.) If these provisions make it into a final bill, we don’t know where the conferees will come out on this.  

Here’s what is now under consideration:

·       The maximum catchup contribution would be increased to $9000, but catchup contributions would have to be made on a ROTH basis.  This would apply to all plans with age 50 catchup contributions, not just to 401ks.

·       No catchup contributions would be permitted for employees earning more than $500,000.

·       Catchup contributions for pre-retirees and long service employees under 403b and 457 plans would be eliminated.

·       Special post-termination employer contributions for 403b plan participants would be eliminated.

·       The rules permitting contributions to a 457(b) plan in addition to maximum 401k and 403b contributions would be eliminated.

The whole point of catchup contributions is to allow participants approaching retirement to make up for any deficit in their retirement savings by making bigger contributions in their pre-retirement years.  We all know that this deficit exists.  Statistics also show that participants don’t make much use of ROTH contributions when they are available. These changes, if enacted, would take retirement policy in the wrong direction.  Tax policy should encourage retirement savings, not make it more difficult to fund a secure retirement.