Senate EARN Act Retirement Bill Includes a Catch-Up Contribution Twist

The final text of the bipartisan Enhancing American Retirement Now (EARN) Act, released by Senate Finance Committee Chairman Ron Wyden, D-Ore., and Sen. Mike Crapo, R-Idaho, on Sept. 8, includes a new twist: Taxpayers with incomes below $100,000 would be allowed to make catch-up contributions as either pre-tax or after-tax contributions.

“This is interesting since it gives people a choice of taking an upfront tax deduction, or not,” Ed Slott of Ed Slott and Co., told ThinkAdvisor Friday in an email.

However, Slott said, “Congress seems to be leaning more to have catch-up contributions go to after-tax accounts, like Roth IRAs and Roth 401(k)s as a revenue raiser. After-tax contributions raise revenue by eliminating tax deductions for contributions. This is why many of the enhanced Roth provisions in the [Secure Act 2.0] bills are in the section titled ‘Revenue Provisions.’ Congress has been continuously encouraging Roth IRAs since they bring in tax money up front.”

As attorneys William Byrnes and Robert Bloink write in their TaxFacts Intelligence weekly newsletter, the EARN Act changes would apply in tax years beginning after 2023. “While the EARN Act must now be reconciled with the House version, it now seems possible that taxpayers may have an additional option when it comes to retirement savings,” the two write.

As Bloink and Byrnes note, the EARN Act proposes to “change the rules governing catch-up contributions so that taxpayers aged 50 and older would be permitted to contribute an extra $10,000 per year if they have reached age 62, 63 or 64 (currently, qualifying taxpayers can make catch-up contributions of $6,500 per year to 401(k)s and $1,000 per year to IRAs). SIMPLE plan participants would receive an additional $5,000 catch-up option. The additional catch-up, however, would be made on an after-tax basis (so it would be treated as a Roth contribution and could be withdrawn tax-free in the future).”

Senate Finance’s EARN Act and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg, or RISE & SHINE, Act, which passed the Senate Health, Education, Labor & Pensions Committee by voice vote on June 14, will become the baseline text for the Senate to negotiate a final Secure 2.0 bill with the House between now and the end of the year.

Wyden said that the EARN Act “includes policies put forward by members on both sides of the aisle, and I appreciate the collaboration of Senator Crapo every step of the way. I look forward to working with Senator Crapo and our counterparts in the House to get the EARN Act signed into law.”

The EARN Act encourages small businesses to adopt retirement plans, makes it easier for part-time workers to participate in retirement plans, and expands the saver’s credit for low- and middle-income workers.

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