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Orrin Hatch Proposes Amendment To Curb 401K Catch-Up

Bozo
  |     |   1,375 posts since 2011

Under current law, 401K participants over age 50 can contribute an additional $6000/yr to their 401Ks, for a total of $24,000, tax-deferred Hatch would amend that by (a) increasing the amount to $9000, but (b) making the catch-up taxable, to be invested in a Roth IRA. It's a sneaky, if elegant, way to increase tax receipts now, while still offering a bone to folks over 50. Problem being, how Roth IRA rules regarding withdrawals remain a mystery under the Hatch proposal.

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Bozo
  |     |   1,375 posts since 2011
My edit function seems to have been disabled. The post above should read "a total of $24,000, tax-deferred. Hatch would amend . . ."
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decades
  |     |   124 posts since 2010
I was wondering if those 401k catch up payments would be tax deductable. Currently they are apparently. I may do a catch up this year , take the tax deduction and then just withdraw the money in a year or so when i am retired and in a lower tax bracket . Does that make sense or am i missing something .
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Bozo
  |     |   1,375 posts since 2011
Decades, re comment above, if you are still employed and a participant in a 401K, there is no age limit on the 401K catch-up. You can die at your desk at age 100. The catch-up contribs are tax-deferred. You don't need to "RMD" a 401K while still working for the company where you have the 401K. Once you retire, you will need to "RMD" the 401K, but, if you are then in a lower tax bracket, you will smile. You aren't missing a thing.

Nor is Orrin Hatch, might I say. The worst-kept secret in DC is that the catch-up enables high-earners to tax-defer an "extra" $6000/yr at a higher tax rate, then withdraw it in retirement at a lower tax rate. Given the fact that so few can even max out their 401Ks to begin with (Vanguard estimates 18%, Fidelity 9%), the catch-up is truly a gift to highly-compensated individuals. But, hey, I'm not complaining. My wife has done it for years.
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Ratesaver
  |     |   187 posts since 2013
My wife is still working and has a 401k still open but she puts 4or5 thousand in her IRA at a credit union ... We get the tax benefit that way... I don't believe there is anything wrong with that....
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Ally6770
  |     |   4,307 posts since 2010
You also get the tax benefit from a 401K it you do not put it in the Roth 401k.
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Ratesaver
  |     |   187 posts since 2013
Yes I do and hope it continues with this new tax law anything is possible... Thanks.
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Bozo
  |     |   1,375 posts since 2011
Ratesaver (re your comment just above), I suspect many folks are waiting until the "dust settles" to make any decisions regarding asset allocations. At first blush, maxing out a 401K and using catch-up with those funds otherwise directed to the IRA might be worthy of study. Of course, it depends on the 401K and its "menu".
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Bozo
  |     |   1,375 posts since 2011
Ally6770 (re comment above), good catch. I haven't seen any details on the Hatch proposal since it was first reported. It would be more logical that it move catch-up into Roth 401Ks, as opposed to Roth IRAs. Inasmuch as so few folks max out their basic 401K to begin with (much less avail themselves of the catch-up), I guess I'm not surprised at the lack of media coverage.
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Bozo
  |     |   1,375 posts since 2011
Moving along, further to my comment just above, anything that even closely resembles true tax reform (the Hatch proposal qualifies, in my humble opinion), gets zero notice. Shouting matches get coverage, even if they are over silliness.

Hatch's proposal, even if it goes nowhere, has merit. Increase the catch-up, but tax it now. Ally6770's point about the Roth 401K did make perfect sense. Include the catch-up within the existing plan and give it a higher amount ($9000 versus $6000).

In a nutshell: (1) Folks would have the first $18,000 in a 401K tax-deferred, subject to tax upon retirement. 401Ks for existing employment are not subject to RMDs until you retire from the firm which holds your 401K. Presumably, RMDs could be deferred until you retire, or die. (2) Catch-up contribs in your 401K would be held within a Roth 401K, and those contribs would be taxable at contribution. The withdrawals would be tax-free. You could contribute a bit more, but the trade-off would be the loss of tax-deferral on the catch-up.

Wasn't that interesting?
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Ally6770
  |     |   4,307 posts since 2010
There is inflation to consider of your original investment. It would be worth much less than when you made the contribution. I do not think that when we are told we are given so much more in retirement from SS than we contributed, that we realize the money that was contributed in the previous 40 or more years ago before retirement was worth so much more than the same amount would be worth now.
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