Senate tax bill cuts 401(k) catch-up funding for some workers

The Senate tax proposal released Thursday would restrict employees earning at least $500,000 from making so-called “catch-up” contributions to 401(k) workplace retirement plans.

Almost all employers offering 401(k) plans allow eligible workers age 50 and over to make the additional contribution, which is $6,000 for 2017, on top of the standard $18,000 cap. Thirty-five percent of workers with salaries of $100,000 or above took advantage of the option in 2016, according to a survey of large employers by benefits administrator Alight Solutions.

The appeal of the contributions to high-income workers is less the tax deduction and more the deferral of that money into a Roth 401(k), where earnings on the money, which is contributed on an after-tax basis, can compound and be withdrawn in retirement without having to pay tax, said Greg Rosica, a tax partner at Ernst & Young.

In 2016, 9.4 percent of eligible workers across all income bands used the catch-up feature, with an average contribution of $4,978 out of the total $6,000 catch-up amount allowed, according to the Alight Solutions survey. In 2015, 13.7 percent of such workers made extra contributions, with an average of $3,745.

“Catch-up contributions are a valuable tool that allows older workers to add to savings for retirement,” said Robyn Credico, senior retirement consultant at Willis Towers Watson.

The U.S. Capitol
The U.S. Capitol Building stands near the Capitol Reflecting Pool in Washington, D.C., U.S., on Tuesday, July 29, 2014. Democrats in Congress are trying again to prevent the federal government from awarding contracts to companies that save taxes by moving their legal addresses outside the U.S. So-called inversions are transactions in which a U.S. company shifts its legal address to a country such as Ireland or the U.K. with a lower corporate tax rate, often through the acquisition of a smaller company abroad. Photographer: Andrew Harrer/Bloomberg

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