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Financial Planning > Tax Planning > Tax Reform

Debate: Are New Retirement Catch-Up Contribution Changes Too Complicated?

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Recent retirement-related legislation, if enacted, would 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).

Under the Enhancing American Retirement Now (EARN) Act, SIMPLE plan participants would also 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catch-up, however, would be made on an after-tax basis (so it would be treated as a Roth contribution and could be withdrawn tax-free in the future).

We asked professors Robert Bloink and William Byrnes, authors of ALM’s Tax Facts with opposing political viewpoints, to share their opinions about modifying the rules that govern retirement plan catch-up contributions for certain taxpayers.

Below is a summary of the debate that ensued between the two professors.

Their Votes:


Their Reasons:

Bloink: We need to be doing everything possible to encourage taxpayers to save responsibly for retirement. Offering tax incentives to allow older Americans to catch up on retirement contributions is the best way to do that.

Byrnes: This proposed change introduces a new complexity into the tax code that we just don’t need. I’m not saying we don’t want to encourage retirement saving. Of course, we want to offer tax incentives to allow Americans to catch up on funding retirement accounts. My issue with this proposal is that it provides different pretax contribution limits for five different age groups — which makes very little sense and seems completely arbitrary.

Bloink: We’re talking about providing an added retirement savings option for Americans who may have finally finished paying off mortgages, student loans, their children’s education, and other significant debt — and now they’re finally able to dedicate a greater percentage of their income toward retirement savings in the years immediately prior to retirement.

Byrnes: Allowing anyone 50 and up to benefit from the highest-value catch-up limit would be a much more efficient way of encouraging saving. We should be focused on fostering simplicity in the tax code so that ordinary Americans actually understand the rules and the benefits available to them. That way, they have the tools to evaluate their personal financial situation and make the most of the tax-preferred savings options out there.

Bloink: With the instability we’ve seen this past year, now is a perfect time to encourage saving to promote security among older Americans. Because the added contributions would be treated as Roth contributions, the government wouldn’t be losing any revenue by offering the additional retirement savings option. I don’t see any problem with this type of savings incentive.

Byrnes: Changing the rules only for taxpayers who have reached three different ages makes no sense to me. Why not apply the change to any taxpayer who is eligible to make catch-up contributions? Because the added contributions are treated as Roths, there’s no financial reason for members of Congress to single out three different age groups and apply different rules. We should simply up the ante on catch-up contributions for all taxpayers who have reached age 50.

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